On Friday, the Dow defied the odds to notch up a record number of highs for the year and the consumer staples space featured a high profile merger which sent the sector tumbling. But it’s unlikely last week will be remembered for any of these events. The fall of the tech giants after a prolonged phase of gains is what will continue to linger on investors’ minds.
It’s quite likely that concerns surrounding tech stocks will continue to hold the spotlight heading into the weeks ahead. A flurry of soft economic reports and the specter of further rate hikes are doing little to ease matters.
Investing in defensive stocks, such as utilities, would make for a prudent choice for investors even as tech majors create more market turbulence in the weeks ahead.
Nasdaq Posts Second Weekly Loss
On Friday, the Nasdaq lost 0.2% or 13.74 points even as the broader markets fared better. More importantly, the tech heavy index declined 1% over the week.
Tech giants such as Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOGL), were first felled on Jun 9, following concerns over their valuations raised by a report from Goldman Sachs Group Inc (NYSE:GS).
A section of analysts believe that the sector could face further losses this year, This is because the likes of Amazon and Facebook are still up more than 30% year to date while Apple and Google have gained in excess of 20%.
A substantial number of market watchers believe that tech fundamentals, especially earnings and product demand, continue to be strong. But the tech selloff shows no signs of letting up, lending credence to the naysayers’ argument.
Risk-Off Trade in Progress?
Skewing the pitch further for investors are a series of weak economic reports. To add to the gathering gloom, a new report released on Friday revealed that housing starts had declined to an eight month low in May. Also, the University of Michigan’s consumer sentiment index reading for June was the poorest since Nov 2016.
This spate of poor reports adds to earlier weak readings on retail sales, sluggish growth levels and more crucially inflation. Such a string of readings acquires even greater significance at a time when the Fed is preparing to tighten monetary conditions further. Following its recent rate hike, the central bank has signaled that another increase could be on the way in September. Additionally, it has indicated that it is preparing to reduce the size of its $4.5 trillion portfolio.
It appears that the Fed seems unperturbed by the recent series of weak economic reports. Certain analysts believe that the Fed is possibly characterizing this as a short term downturn. This is contrary to the data that investors are receiving now, leading to heightened concerns over another rate hike.
Such a state of affairs is also leading to a change in the risk profile of investors as a whole, triggering what is known as a risk-off trade. This is why the Utilities Select Sector SPDR XLU has gained 0.8% over the last five trading days. Interestingly enough, this class of investments was also under scrutiny for valuation fears recently. But their defensive nature and the promise of steady dividends have helped them regain popularity among investors.
Our Utility Stock Choices
Even the most bullish of market watchers think that the next few weeks could at best be quiet ones for the markets. On the other hand, naysayers continue to tout the prospect of an extended stretch of losses for tech stocks. It is easy to comprehend why utilities, with their promise of safety and steady dividends, would regain favor in such a situation.
Picking select stocks from the sector makes for a wise choice at this time. However, picking winning stocks may be difficult.
This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.
Telecom Argentina SA (ADR) (NYSE:TEO) is a provider of telecom and related services in Argentina and other countries.
Telecom Argentina has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 10.8% for the current year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 16.19, lower than the industry average of 17.37. It has a dividend yield of 1.8%. The stock has returned 36.9% year to date, outperforming the Zacks Wireline Non-US Market sector, which has gained 8.5% over the same period.
Veolia Environnement SA (ADR) (OTCMKTS:VEOEY) is the only global company to offer the entire range of environmental services in the water, waste management, energy and transportation sectors.
Veolia Environnement has a VGM Score of A. It has a P/E (F1) of 17.81x, lower than the industry average of 26.30. It has a dividend yield of 3.3%. The stock has returned 28.2% year to date, outperforming the Zacks Utility – Water Supply Market sector, which has gained 10.8% over the same period. The stock has a Zacks Rank #1.
Huaneng Power International Inc (ADR) (NYSE:HNP) develops, constructs, owns and operates large coal-fired power plants throughout China.
Huaneng Power has a Zacks Rank #2 (Buy) and a VGM Score of A. Its earnings estimate for the current year has improved by 0.8% over the last 30 days. It has a dividend yield of 8.9%.The stock has returned 11.6% year to date, outperforming the Zacks Utility – Electric Power Market sector, which has gained 8.5% over the same period.
Unitil Corporation (NYSE:UTL) is a registered public utility holding company which distributes natural gas and electricity in the U.S.
Unitil Corp. has a Zacks Rank #2 (Buy) and a VGM Score of B. The company has expected earnings growth of 7.7% for the current year. It has a dividend yield of 2.9%. The stock has returned 11% year to date, outperforming the Zacks Utility – Electric Power Market sector, which has gained 8.5% over the same period.
Eversource Energy (NYSE:ES) engages in the energy delivery business. It transmits and delivers electricity and natural gas to over 3.7 million residential, commercial and industrial customers in Connecticut, New Hampshire and Massachusetts.
Eversource Energy has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 6.7% for the current year. Its earnings estimate for the current year has improved by 0.1% over the last 30 days. It has a dividend yield of 3%. The stock has returned 14.5% year to date, outperforming the Zacks Utility – Electric Power Market sector, which has gained 8.5% over the same period.
CenterPoint Energy, Inc. (NYSE:CNP) is a domestic energy delivery company that provides electric transmission & distribution, natural gas distribution and competitive natural gas sales and services operations.
CenterPoint Energy has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 11.4% for the current year. It has a dividend yield of 3.7%. The stock has returned 17.2% year to date, outperforming the Zacks Utility – Electric Power Market sector, which has gained 8.5% over the same period.
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