Market Uncertainty Lingers: 4 Utility Picks

However, stocks ended the week with a whimper with Friday witnessing low trading volumes. Tensions continue to simmer below the surface as investors brace themselves for more volatile trading in the days ahead. Given this environment, it may be a good idea to invest in safe haven stocks and utilities are a natural choice under such circumstances.

China Fears Remain

Fears about China had subsided last Wednesday. Instead, investors have chosen to focus on the resurgence in oil prices and domestic data. The People’s Bank of China (PBOC) decided to cut interest rates for the fifth time since November and reduced reserve requirement ratio for all banks in order to stem a market rout.

However, investors remain unconvinced whether China’s latest measures will reduce global growth concerns. As of Monday, Asian stocks are likely to suffer their highest monthly decline as weaknesses in the world’s second largest economy continue to weigh down investor sentiment. Whether this contagion spreads to U.S. markets once again remains to be seen.

Oil Prices Surge

The other major development last week was resurgence in oil prices. Oil prices surged on Thursday on short selling. Additionally, Venezuela contacted OPEC to hold a meeting intended to boost global oil prices. Both WTI and Brent registered their largest one day dollar gains in three years.

Investors’ move to eliminate their short trading positions and increase in tensions in Yemen helped oil prices move north for the second day on Friday. Saudi’s ground offensive on Yemeni forces raised concerns about supply disruption, which eventually boosted oil prices.

However, the outlook for oil prices remains bleak in the long term. Global growth concerns and a supply glut may soon push prices downward again. This may only be a short term correction which could soon evaporate.

Rate Hike Uncertainty

Several market watchers are convinced that a September rate hike is mostly unlikely. Last Wednesday, New York Federal Reserve President William Dudley said that a September rate hike is “less compelling.” Given the slowdown in China’s economy, decline in commodity prices and volatility in financial markets, he said, an increase in interest rates next month will be less appropriate.

Federal Reserve Vice Chairman Stanley Fischer’s comments on Friday intensified the rate hike debate. According to him, a September rate hike was “pretty strong” before China devalued its currency. He said that China’s devaluation “is relatively new and we’re still watching how it unfolds.” He added: “We’ve got time to wait and see the incoming data and see what is going on now in the economy” before deciding on hiking rates.

Our Choices

While strong GDP numbers and other domestic data are improving chances of a rate hike in September, global worries may yet lead to policymakers putting off such a decision for later this year. Last Friday, the fear-gauge CBOE Volatility Index (VIX) dropped 0.2% to settle at 26.05. However, it has hovered above its 10-year average of 20 for six consecutive sessions. This means the specter of volatility hasn’t really faded away.

Most of the S&P 500’s sectors witnessed strong gains or relatively marginal losses over a volatile week. The Utilities Select Sector SPDR (XLU) is the only sector which hasn’t posted losses over the month as of now and is up 0.2%.

In an environment where uncertainty continues to linger, these stocks may be the safest option. Additionally, value choices could be profitable even in a situation where stocks continue to trend higher.

Below we present five stocks set to benefit from this trend. Thanks to our new style score system we have been able to identify a few value stocks which have incredible potential in the near term.

Our research shows that stocks with Value Style Scores of ‘A’ or ‘B’ when combined with Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space.

WGL Holdings Inc. WGL is a public utility company that delivers and sells natural gas to metropolitan Washington, D.C. and adjoining areas in Maryland and Virginia.

WGL Holdings holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘A.’ The company has expected earnings growth of 11.8% for the current year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 18.29.

Unitil Corp. UTL is a registered public utility holding company which distributes natural gas and electricity in the U.S.

Unitil holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘A.’ The company has expected earnings growth of 6.1% for the current year and it has a P/E (F1) of 19.12.

Chesapeake Utilities Corporation CPK is an energy company which is engaged in the distribution of electricity and propane. It also distributes and provides transmission services for natural gas. 

Apart from a Zacks Rank #2 (Buy), Chesapeake has a Value Style Score of ‘B.’ The company has expected earnings growth of 12.5% for the current year and it has a P/E (F1) of 17.74.

Ameren Corporation AEE is a utility company, which generates and distributes electricity and natural gas to residential, commercial, industrial and wholesale end markets in Missouri and Illinois.

Ameren holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘B.’ The company has expected earnings growth of 6.6% for the current year and it has a P/E (F1) of 16.06.

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