Utilities undoubtedly play a major role in the development of a nation. The sector is historically considered to be a less-risky area to bet on given its defensive regulatory nature, which helps the participants deliver steady earnings. The payment of regular dividends also adds to the perceived defensiveness of the sector.
However, the utilities have been under the regulatory scanner for quite some time now as environmentalists clamor about carbon emissions and global warming issues, forcing the authorities to take note. Notably, the power producers have the dubious reputation of contributing one-third of the total greenhouse gas emissions in the U.S.
In Jun 2014, the U.S. Environmental Protection Agency came out with the Clean Power Plan proposal, which aims to lower carbon emission from the power sector by as much as 30% in 2030 from 2005 levels.
If the proposal is accepted without modification, the utility operators will either have to shut down their old fossil fuel units or get new pollution control measures fitted in their generation plants to stay in operation. In any case, regulatory compliance will raise the operating costs of the utilities.
Moreover, regulatory setbacks, weigh upon utility stocks. A delay in rate case decisions or approval of lower-than-requested rates by the Public Service Commissions can potentially impact the modernization and development plans of the regulated utilities. The regulated utilities largely depend on timely and constructive regulatory outcomes for infrastructure development which requires huge capital outlay.
A report from Economic Development Research Group Inc. found an alarming gap between the water infrastructural requirement and actual investments planned for the coming years. The gap is expected to reach $84 billion in 2020 and widen to $144 billion in 2040.
The report also revealed that without proper renewal or replacement, nearly 44% of the existing pipelines will become too poor for operation by 2020. The utility operators have begun to invest in their ageing infrastructure, but it appears the initiatives are too little too late.
So, taking the above factors into consideration, it would be a prudent idea to find the laggards in the utility space and get rid of them. Of course, if these are not in your portfolio, don’t consider a fresh bet.
3 Utility Stocks to Dump Right Now
We have screened utility stocks that are sell rated and thus seeing negative earnings estimate revisions. These stocks have also showed a negative return over the last 30 days.
We set the follow parameters on on Zacks Stock Screener:
• Zacks Rank greater than or equal to #4
• % Change F1 Est. (4 weeks) less than equal to -4.00%
• % Price Change (4 Weeks) less than equal to -1.00%
Here are the 3 stocks that passed through the screen:
Dynegy Inc. (DYN) has a Zacks Rank #4 (Sell) and has lost nearly 19% over the last 4 weeks. In addition, the Zacks Consensus Estimate for 2014 has gone down by nearly 15% in the past one month.
Houston, TX based Dynegy Inc. along with its subsidiaries produces and sells energy and ancillary services in the U.S.
SJW Corp. (SJW) carries a Zacks Rank #4. The stock lost nearly 2.7% over the last four weeks. In addition, the Zacks Consensus Estimate has gone down by nearly 8% in the last 30 days.
San Jose, CA based SJW Corp. is a water utility operating through its two segments, Water Utility Services and Real Estate Service.
Pure Cycle Corporation (PCYO) is another Zacks Rank #4 stock that witnessed almost 1.9% loss over the last four weeks. In addition, consensus estimates for 2014 are down by nearly 14.3% over one month.
Denver, CO based Pure Cycle Corporation operates and maintains water and wastewater systems in the Denver metropolitan area.
Bottom Line
Utilities will continue to remain an attraction to risk-averse investors because of the above discussed benefits, but dumping the weak stocks is necessary for maximizing returns from this sector. Particularly, given the heightened regulatory challenges, it is perhaps the right time to take such decision.
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