Are Utilities the Only True Bargain Left in the Bin?

"Shiller's P/E" is a straightforward valuation concept. Take Tuesday's price (S&P 905) and divide it by the last 10 years of earnings results.

According to the team of Arnott and West at Research Affiliates, the historical valuation level for this metric is 16.4; today's Shiller P/E is not far off at 15.8. (Back in March, the same measure had dipped as low as 11.2.)

With today's markets approximating a fairly valued Shiller's P/E, one wonders whether the current level of market volatility/risk justifies additional stock exposure. In fact, one might conclude that it only makes sense to pursue undervalued ETFs with less risk than the S&P 500 SPDR Trust (SPY).

For the purpose of identifying less risky investments, I screened for 1-year betas below 0.90. And for undervalued ETFs... I used price-to-book ratios that came in at less than 2 as well as "price-to-Morningstar-fair-values" of 0.90 or lower.

Low-Risk and Underappreciated Stock ETFs
				P/B	P/FV		Beta
Vanguard Utilities (VPU)				1.3	0.89		0.55
SPDR Select Utilities (XLU)				1.5	---		0.62
iShares DJ Utilities (IDU)				1.5	---		0.65
Vanguard Communications (VOX)				1.5	0.76		0.8

It's no surprise that telecom and utilities were less "volatile" than the broader market over the last year. However, it is a bit of surprise... in a time when cash flow/income may be more critical to some investors than growth... that investors aren't biting the bigger "yielders."

Utilities remain the biggest underperformer in 2009. Nevertheless, in the context of entire bear market performance, utilities haven't been all that shabby. More importantly, if valuation matters at all, investors may start acquiring shares of Vanguard Utilities (VPU) and SPDR Select Utilities (XLU) in the weeks ahead.

click to enlarge

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Comments

[jeandit75:]

Are Utilities the Only True Bargain Left in the Bin? No, I'd also include cash and 10-year bonds

Jul 15 07:31 AM

[john s. gordon:]

uncertainly as to carbon related legislation will continue to weigh on utility stock prices.
> jack

Jul 15 09:55 AM

[jarco:]

Why pay Mutual Fund fees when either direct ownership or ETF's are available. In a static market, fees could eat up 10-25% of the gains

Jul 19 04:09 PM

[mind_geek:]

NVAX is at the exact same price it was 13 years ago and near a 52 week high...what a bargain! GGN is an over-leveraged closed end fund trading at a PREMIUM to its net worth and a hefty 1.69% management fee. PSEC is a venture capital company that has trended lower every year since it became public in 1984.

Keep those money making ideas coming! :0|


On Jul 17 09:26 AM Freya wrote:

> Bargains? how about PSEC, GGN, NVAX
>
> want more?

Jul 24 01:38 AM

[mind_geek:]

I think the author is spot on in this article. Utilities have underperformed and been somewhat forgotton on wall street this year...the perfect time to buy. Utilities have outperfomed the S&P 500 over the last 5 years by 9% points but have missed the entire years rally. The XLU is your best and most liquid play here.

Jul 24 01:51 AM

[mind_geek:]

Cash and 10 year bonds?? Last I checked cash is paying less than 1% and next year when inflation kicks in, 10 year bonds will plummet into oblivion. Granted the economy still stinks...but your setting yourself up for failure with those picks.

Its hard to value long-term treasuries when the government is printing them by the truckload. Sovereign and emerging market foreign bonds are where the money will be made in the next 3 years.


On Jul 15 07:31 AM jeandit75 wrote:

> Are Utilities the Only True Bargain Left in the Bin? No, I'd also
> include cash and 10-year bonds

Jul 25 01:50 AM