Monday, April 13, 2009

Utilities: Getting Ready for the Up Move that Follows the Next Down Move

A story in the Financial Times' Lex column reminded me of a post I had intended to cobble together. While we don't expect a triple from the junk-rated utilities, there will be some nice moves. First, from the FT:

US utilities

When utilities produce a shock, it is usually of the literal rather than figurative variety. Lately though, the normally staid sector is startling shareholders and customers alike.

Power demand in the US over the past three months fell 2.5 per cent compared with the same period a year ago, according to the Edison Electric Institute, while natural gas demand has slumped too. This may not seem like a big shift, but it is problematic for a business with high fixed costs, considerable leverage and investor expectations of stable dividends. Sagging demand comes as electric utilities devote more cash than ever to capital expenditure – about $80bn this year, or twice 2004’s level. The typical power utility carries a triple-B rating, little changed from recent history, but is paying more than it has in several years to issue debt. Free cash flow among utilities tracked by EEI went from positive $17bn in 2004 to negative $21bn last year, and is likely to drop further.

Households will eventually feel the pain in their monthly bills, mitigating the effect of falling fuel prices....MORE
In February we posted "Junk-rated Financials, Utilities Likely to Lead Next Bull Market":
...Standard & Poor’s thinks speculative grade financial and utilities companies are the most likely to lead the rally in the next bull market....
We've seen the move in the financials, with both Citi and BAC tripling off their early March lows.
Bespoke Investment Group had a couple posts that give us pointers to the potential:

April 3
Stocks Furthest Above and Below 50-Day Moving Averages

...We also provide the stocks that are trading the furthest below their 50-day moving averages. Even though the market has rallied more than 25% off its lows, these names have struggled to participate. Most stocks on the list are in the Health Care and Utilities sectors.


And today (go to Bespoke for all ten charts):

Percentage of Stocks Above 50-Day Moving Averages

...Health Care has the second weakest breadth reading at the moment with only 51% of its stocks above their 50-days. And the most defensive sector in the market -- Utilities -- also has the smallest number of stocks abover their 50-days at 49%.