Utility Stocks Smashed... Again (ETFs: IDU, UTH, XLU)

 |  Includes: IDU, UTH, XLU
by: Sandy Cohen

Utility stocks were slammed in the markets again yesterday, October 10th, writes utility analyst Sandy Cohen. The group was down about 1.9% today, and is now down about 7% in the last week. Each of the major utility indices, as well as the Utility ETF's have dropped significantly in the last week. Since October 3rd, the Dow Jones Utility Average has declined 7.2%, the IDU has declined 6.7%, the UTH has declined 6.9% and the XLU has declined 6.7%.

Today, October 10th, the Dow Jones Utility Average declined 71.88%, the IDU declined 1.62%, the UTH declined 1.76% and the XLU declined 1.77%.

Why? The Wall Street Journal published an article this morning highlighting the run the group has had this year, and over the last 2-3 years. The article also highlighted valuation concerns, and exposure to rising interest rates that could hurt the yield heavy utility industry's relative attractiveness.

Though we have not completed any heavy lifting on valuation, we have long felt such a correction is long overdue. The utility industry had recently traded at higher price to earnings multiples than the S&P 500, something that had not happened in any recent memory (going back more than 20 years). And the valuation of individual utility stocks had become such that the spread of yields from the highest to lowest yielding utility stocks had shrunk to record narrow spreads (less than 300 basis points). This showed that the market was not differentiating between individual utility stocks on the basis of any differences in quality, growth, risk or management skills ... issues that ALWAYS have a large impact on individual utility stock valuation over time.

See this link from an article we wrote and posted on August 8th, 2005: Are Utility earnings Multiples Justified?. As a note, even with the recent correction, the Dow Jones Utility Average is still trading about 6% higher than at the time we published that article.

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