In part one of this series, we came up with several technology stocks that I have deemed worthy of selling in anticipation of a market pullback. We have established that their gains were due (in part) to the market's "rising tides." For similar reasons, in part 2 we identified 5 financial stocks that may see a near term pullback and then it was followed by a look at healthcare, then consumer staples as well as energy. In this piece, we are going to look at a few plays in utilities and see which firms may suffer a near term pullback.
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Clearly the year to date sector performance above shows that investors are not only excited about what lies ahead in 2012, but have become decisive about what industries matter the most. So again, with such early gains and with the broader indices having approached record territories, should investors be in a fearful mode and begin to lock in some profits as the bear market may just be around the corner? This question is not that difficult to answer if one has studied recent history.
Trading the sector gains
They say "a rising tide lifts all boats." There is unquestionable truth in this theory especially in the stock market as evidenced by this bullish run we are now seeing. So when it comes to stocks, we need to understand that a strong economy can propel even the most challenged business models.
In this article, which is the sixth in the series of looking within each sector, we are going to try to identify certain utilities stocks that might be on the verge of a pullback and ways to possibly mitigate some risk and exposure to losses. The benefit of this is that if you are on the sidelines, hopefully you will be able to get an idea of a possible good entry point.
We have approached one of the sectors that by and large have not fared particularly well in the market so far this year relative to the others that have generated high single digit gains. So I'm not entirely certain if this is a good, bad sign or merely "table-setting" for what lies ahead. But I suspect for one reason or another, investors have decided to take money out of this sector and placed into those that are riskier for the chance of earnings higher growth.
However, despite the lagging performance of the sector, there are several stocks that have posted significant gains early on in the year. For investors, it would be wise to lock in these gains now if the likelihood exists that market sentiment has indeed begun rotating out. For example, in the water utilities there are names such as Connecticut Water Service (CTWS) that has gained 15 percent on the year thus far. It pays a decent dividend at 3% which makes it pretty safe, however, it will likely be weighed down if the entire sector makes a turn for the worse. The stock currently trades at $31.21 and is only 5 percent away from its 52-week high. Now may be a time to lock in some gains.
Another name that I have been looking at within gas is Clean Energy Fuels Corp. (CLNE) - for similar reasons to Connecticut Water. The stock has surged on the year with a gain of 30 percent and it is at the cusp of its 52-week high. The balance sheet on this company is not great, but it is improving. According to its website:
The leading provider of natural gas fuel for transportation in North America, Clean Energy is the smart decision for vehicle fleets demanding the most reliable connection to CNG and LNG. With an integrated offering of best-in-market services, we have the flexibility to adapt to your specific fueling needs - from constructing, equipping and maintaining fueling stations to converting vehicles to securing the financing.
There is quite a bit to like here. However, I think for investors it would be more prudent to like and realize a 30 percent YTD gain and wait for the pullback.
Stocks to consider
We are going to reverse course a little bit and discuss stocks within the sector that have not fared as well and yet may see some increase buying since they may have likely hit their bottom.
CenterPoint Energy (CNP)
CenterPoint Energy has had better days. It appears that the stock has not seen any green arrows at any point during the year though the broader market has produced nothing but gains. There is reason to suspect that this trend may change as the stock has climbed 4 percent since reaching a recent low of $18.07 at the end of January. While posting solid earnings relative to its peers, the stock also offers a handsome dividend at 4.3 percent yield.
FirstEnergy Corporation (FE)
This company also deserves some consideration. Aside from the fact that it has traded relatively flat for the past several months, it offers an excellent dividend at 5.1% yield. With a P/E of 17 it might be considered relatively expensive, however, the stock is right at its 50-day moving average and has shown to be pretty resilient of late. Relative to its peers, its underlying fundamentals presents a great opportunity for value investors who are willing to be patient.
Inergy, L.P. (NRGY)
One stock in this sector that didn't even benefit from the strength this sector had last year is NRGY. It has been steadily grinding lower since topping out early in 2011 and it has been following a steady pattern of establishing a resistance level before ultimately breaking down. After holding near $24 for two months, it is now starting to set new lows again continuing the trend.
Public Service Enterprise Group (PEG)
PEG is another utility experiencing similar movement as those mentioned above. The company recently fell under some important points of resistance at $31 after having traded flat for a considerable amount of time. But its stock has been slowly building a base that suggests that the stock may begin to move upward. As with the other firms above, PEG pays a respectable dividend of 4.5% and trades at a decent P/E of 10. The stock does present some value at $30, but investors should be patient and realize that it may take the rest of the year for it to regain its previous high of $35.
Thank you for reading the energy sector stocks in part 5 of this series, in the next piece we will investigate the communications sector and see which stocks might be on the verge of a pullback.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.