Utilities Are Set Up to Beat Expectations

Aside from the blustery winds that are whipping around the greater Washington, D.C., area, I almost fell out of my chair when I opened my gas utility bill. I was bracing for a higher bill because of the severe winter weather, but I was not mentally prepared for the 15% increase in my bill in February compared with January. I say that because my January bill jumped more than 38% from my December bill. I suspect I am not alone in this, and I believe that many people across the U.S. will be similarly shocked when they open their February-dated bills for gas and electric. Since more snow is expected across the mid-Atlantic and Northeast regions of the country, along with a return of freezing temperatures early next week, the first half of March is shaping up to continue the cold trend. That likely means homeowners and businesses will not see a huge drop in their March bills. I'd expect some declines, but odds are that the March bill will be higher than it was a year earlier. All of that is music to the ears of utility companies such as Con Edison (ED), Pepco Holdings (POM), WGL Holdings (WGL) and others in the central and eastern U.S. As I noted earlier this week, amid the rash of negative guidance offered by S&P 500 companies, the only sector to experience an increase in earnings expectations was the utilities sector. Two prime examples were Entergy (ETR), which increased expectations for the current quarter to $1.14 per share from $0.91 per share, and Public Service Enterprise Group (PEG), which boosted its outlook to $0.90 share from $0.74. What's somewhat surprising is how many of the analysts who cover the utility companies have yet to adjust their earnings expectations to reflect what's been going on in the current quarter. Case in point, of the five Wall Street analysts who cover WGL Holdings' shares, only one has moved up his or her estimates in the last month. In some cases, such as South Jersey Industries (SJI) and Chesapeake Utilities (CPK), there have been no adjustments to expectations, even though only one analyst follows each company. To be fair, some Wall Street analysts are making adjustments. One company that has seen such activity is New Jersey Resources (NJR): The two analysts who follow the shares have both raised their forecasts for the current quarter. March quarter expectations for NJR now stand at $1.70 per share, up from $1.69 per share 30 days ago. As I have said, there are many, many utilities out there, and it takes a better person than I to drill down on all of them, particularly since many of them have little to no research coverage. A better buy instead is one of my favorite ETFs, the Utilities Select Sector SPDR ETF (XLU), which counts 32 publicly traded companies among its holdings. Given the relatively short time frame until weather normalizes -- yes, at some point spring will return -- a better way for risk-tolerant investors to profit is to trade a XLU call option. My recommendation would be the XLU April 40 call option, which closed Thursday at $0.87. Here's a take on the technical aspects of XLU from Real Money Pro's Bob Lang. This is a very strong chart that has had some great momentum since the start of the year. In fact, the recent move took a rest and created a nice handle from a cup/handle formation. The next step is higher as it starts to carve out the left side of the coming cup/handle pattern (potentially). MACD is nearly on a buy signal (circled) and momentum indicators are overbought, but they can stay that way for awhile. Relative strength vs. the market is impresive and it appears higher prices are ahead based on the technicals. Utilities Select Sector SPDR ETF (XLU) Source: StockCharts.com View Chart » View in New Window »

Utilities Are Set Up to Beat Expectations

Their fundamentals have gotten ahead of analysts' estimates.

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