Giving stock investing advice has been no easy task in March. Investors got a shock after popular uprisings in the Arab world and the earthquake in Japan. Add to this the lingering European sovereign debt crisis, soaring energy prices and a housing market that appears to be in the early stages of a double dip, and it is not surprising that investors are apprehensive and investing advice is hard to pin down.
After two solid years of gains, many global stock markets are flat or down for 2011. The question on every investor’s mind at the moment is “What happens next?”
Unfortunately, this is the wrong question to be asking. As Benjamin Graham, the mentor of Warren Buffett and the father of the investment profession, eloquently wrote, “Forecasting security prices is not properly a part of security analysis.”
The question you should be asking are “At current prices, can I expect a reasonable return?” and “Is the risk I’m taking proportional to the return I hope to achieve?” You cannot control whether the economy dips into recession or not. But you can control what price you pay for your investments.
Investors with this perspective can keep their emotions in check and avoid selling at the wrong times – and buy at the right ones. This strategy can minimize mistakes and allow investors to successfully take the other side of trade when others are panicking.
With this in mind, what investments look attractive in this environment?
Few sectors got hit as hard as the normally-boring utilities sector. The Utilities Select Sector SPDR (NYSE: XLU)—generally one of the most conservative sector ETFs—fell by 7% in a matter of days on investor fears that Japan’s nuclear crisis would result in America’s nuclear power providers coming under greater regulatory scrutiny. But does this make sense? Most American utilities have little exposure to nuclear energy, and it is difficult to argue that those that do are somehow more at risk due to an earthquake half a world away. At a time of high energy prices, what politician would want to do anything that would further crimp supply and cause prices to go even higher?
Utilities would seem like an attractive investment at current prices. The sector trades at a P/E of 12 and pays a solid, safe, and growing dividend yield of 4%.
Should the bull market resume, the utilities sector should participate in the rally. But if we drift back into recession, investors can still enjoy a yield that is higher than what they can get in much of the bond market while waiting for prices to recover. XLU is a buy.