This Utilities Stock Has Room to Move

The S&P 500 index is within touching distance of its recent all-time highs (1775.22 on Oct. 30). Still, the muscular benchmark appears to be losing some of its energy. When I see this kind of environment setting up, I raise my protective stops on long positions, turn away from whizzy growth stocks and head to the more defensive utilities sector. To that objective, the Select Sector SPDR Utilities ETF (XLU) is a good representative of this group. In exploring components of this defensive sector, I've targeted Public Service Enterprise Group (PEG) as a potential long candidate. Founded in 1985 and headquartered in Newark, N.J., this multi-utilities company operates nuclear, coal, gas and oil-fired generation facilities in the northeastern and mid-Atlantic U.S. PSEG also distributes electricity and natural gas to residential, commercial and industrial customers and invests in the development of solar generation projects. In its recent earnings announcement, PSEG raised its 2013 operating earnings-per-share estimate to $2.50, from $2.35, and its 2014 estimate to $2.55, from $2.40. The utilities company sports a price-to-earnings ratio of 13.39x current earnings, a substantial discount to its peers. The company also pays a substantial dividend of $1.44 per share, currently yielding 4.30%. Now, let's look at PSEG's daily chart. The stock opened at $30.90 on Jan. 2. It immediately lost altitude along with the other utilities, as sexier growth stocks shot higher and attracted investor attention. But by mid-January, PSEG found support at $29.70 and reversed into a high-energy, textbook-perfect uptrend. That glorious up-move lasted until May 5, when price touched an intraday high of $37. PEG Daily RealTick View Chart » View in New Window » Directionally speaking, companies in the utilities sector tend to move in lockstep, and in that first week of May, the sector and its components lost altitude. PSEG retraced a portion of its earlier gains, dropping through its 200-day simple moving average (black on this chart) in June. It finally found price support from February lows at $31.03 on June 21. From that low, PSEG has formed a triangle formation on its daily chart, as shown by the blue lines. At present, the stock is trading just above its 200-day simple moving average and its 50-day SMA (green), a positive sign. The 20-day SMA (red) sits just above price, but in recent price action, that line has not offered resistance. As we approach Monday's close, PSEG is trading at $33.49. This week, if the market environment is favorable and if utilities rally, I will consider building a position in PSEG in an entry window between $33.30 and $33.70. I will begin with purchasing one-third of my intended position in that entry window, and then add the remainder of the position if PSEG breaks above the upper blue line, above $34.35. My initial protective stop will be set at $32.85, beneath the 50-day SMA. My first profit target is $36, and my second profit target is at $37, at the aforementioned May high. In its last earnings report, PSEG stated that it is on track to achieve its goal of double-digit earnings growth, driven by increased investment in transmission and strong locational advantages. With that said, if the broader market weakens here, and if investors look to utilities as a safety play, PSEG may be poised to move higher.

This Utilities Stock Has Room to Move

As growth stocks falter, PSEG looks like a solid defensive pick.

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