Utility and pipeline stocks not only outperform during economic downturns but stock market recoveries as well, so investors should consider hedging their bets and play the recovery without risking performance.
The group typically leads a stock market rally by one or two months and the sees a similar jump as the market during the early stages of a recovery, Canaccord Adams analyst Bob Hastings told clients. This recovery could last several months or more than a year depending on the downturn.
He highlighted Emera Inc. (OTCPK:EMRAF), Fortis Inc. [FTS/TSX] and TransCanada Corp. (TRP) as buy-rated names in the group, with Fortis getting an upgrade due to recent weakness in its shares. His price target on it is C$29, while Emera is at C$25 and TransCanada C$45.
They have risen 11.8% since August 16, 2007, in addition to an average dividend yield of 4.1%. This works out to a total return of 15.9%, compared to just 1.8% for the S&P/TSX composite average in the same period and a decline of 11.5% for the Dow Jones Industrial Average.
"While not the best group in terms of absolute performance, it does as well as the overall market with significantly less risk" as many investors switch from cash to conservative investments, he said. And if there is no rebound, the group outperforms.
The group's valuations have also declined and is now trading at historically low price-to-earnings ratios relative to interest rates, it offers historically high dividend yields, and TransCanada in particular offers more growth potential than it has in the past, the analyst said. This is due to higher infrastructure spending on oil and gas transportation as well as power generation.
Mr. Hastings said:
As the market gathers steam, many investors become more willing to recognize and pay for growth.