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PG&E, Duke Energy, AEP and Pinnacle West top Barclays' new utilities ratings

Aug. 23, 2023 7:57 PM ETUtilities Select Sector SPDR® Fund ETF (XLU)OGE, DUK, AEE, AEP, CMS, CNP, D, DTE, ED, EIX, ETR, EXC, FE, ES, PEG, PNW, PPL, SO, SRE, WEC, AES, PCG, ATO, POR, NWE, EVRGBy: Carl Surran, SA News Editor36 Comments
High Voltage Electric Power Lines At Sunset

imaginima/iStock via Getty Images

"It's too soon to be bullish" on the U.S. power and utilities sector (NYSEARCA:XLU), but there is "plenty to like" across value large-caps, Barclays said Wednesday in initiating coverage of 26 stocks in the group with a neutral view on the industry.

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Comments (36)

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Impacted by cooler temps? I thought it was the hottest summer ever in the history of the world. Me thinks I smell a rat.
I think SO and their nuclear energy should get more respect
Lake OZ boater profile picture
"VPU: Enough Is Enough, It's Time To Buy Large-Cap Utilities Again"

ferjen profile picture
I've been nibbling on WEC:


But maybe a utility fund is a better idea?
Lake OZ boater profile picture
@ferjen For your due diligence...

1. There is no standard for "fair value" for stocks, only competing theories. Fundamental value for stocks is generally considered to be after-tax earnings, cash flow or some combination of the two and the discount rate to put these flows in present value terms.

2. Using value god Ben Graham's Intrinsic Value calculator (see link), WEC is not offering a defensive investor a "margin of safety", even at the current price.


Calculator inputs...
Normal earnings: $4.28
Projected EPS growth rate next 5 yrs: 5.5%
Margin of safety* (subjective; see quote below) : 25%
Current price: $85.26

Those metrics can be found here:

Moody's Aaa bond yield (also an input) of 4.97% can be found here: ycharts.com/...

Calculator output...

Intrinsic value per share: $73.90

3. Hendrik Bessembinder reported on the risky nature of individual stocks . His study from 2018 appeared in the Journal of Financial Economics. It covered the period 1926 through 2015 and included all common stocks listed on the NYSE, Amex and Nasdaq exchanges.

Here's a high level summary of his findings...

-Only 47.7% of returns were larger than the one-month Treasury rate.

-Even at the decade horizon, only a minority of stocks outperformed Treasury bills.

See: "Do Stocks Outperform Treasury Bills?"

4. Putting your money into a broadly-diversified utility fund or utility ETF will provide you with good exposure to the sector and reduce idosynchratic risk associated with picking individual stocks.

5. A few diversified utility ETFs for your consideration: XLU, RSPU, VPU, FUTY.
* "The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future." Ben Graham
Abullman profile picture
My portfolio consists of 57 stocks, 19 are utilities of which 14 are mentioned in this article. In addition, I used to own 10 utilities discussed in this article that I used to own but sold for various reasons. Utilities are certainly not for everyone but they, for the most part, produce a steady growing income for someone retired like myself.
hafen profile picture
@Abullman I wish we retirees had a dedicated blog or chat room; it would be interesting to share strategies. I own, it varies, I do some trading, 58-65 stocks, utility and energy heavy, but a bunch of others, so others would think as being too risky for 82 years old, but it all depends on what our worth is and how we get the money we use to “pay the bills”.
Abullman profile picture
@hafen I used to own 93 different stocks but have pared it down to 57 due to the time involved in staying on top of things. I’m concentrated in utilities, pharma, food, and tech because everybody needs what they offer. I’m doing my best to get out of telcos since most of that industry is littered with underperformers - T, LUMN, VOD, BT, etc. Others can back up their truck and load up on those equities where I believe the risk far exceeds the potential rewards.
hafen profile picture
@Abullman Nice reply. Somewhat similar strategies, but I’m trying to exit single names in favorof ETFs and CEFs; I’m, also into option funds, JEPI, JEPQ, many more. My goal is sustainability and less management. SCHD, etc., are also core holdings.
PCG is a great pick even climbing and climbing and they left Avangrid off the list which I like since it’s done nothing for anyone it’s a slow falling knife . If you bought it 5 years ago your down . If you bought it a year ago your down .
Lake OZ boater profile picture
"It's too soon to be bullish" on the U.S. power and utilities sector..."

1. Is it? Here's what value god Benjamin Graham wrote :

"Our basic recommendation is that the stock portfolio, when acquired, should have an overall earnings/price ratio—the reverse of the P/E ratio—at least as high as the current high-grade bond rate. This would mean a P/E ratio no higher than 13.3 against an AA bond yield of 7.5%."

Found in Chapter 14: Stock Selection for the Defensive Investor in his book, The Intelligent Investor.

The AA Corporate Bond Yields are now about 5.11%


Based on the same Graham principle, a defensive investor today could consider stocks with P/E ratios up to 19.6 (since 10-year AA Corporate Bond Yields are roughly 5.11 %.)

100 ÷ 5.11 = 19.6

Based on Finviz.com's group screener of the eleven (11) S & P 500 sectors, the utilities group has a blended P/E of about 17.1, which IMHO makes it attractive for building a position.


2. If a "defensive" investor is in search of an economically resilient S & P 500 sector that will also add diversification to their stocks mix, he/she should consider adding utilities.

Utilities are often under-weighted in many portfolios, but offer diversiying benefits and attractive yields above the market index. (XLU = 3.3%; SPY= 1.5%)

A factor regression analysis (link) shows utilities have lowest R-squared of all the S & P 500 sectors. (see link; scroll to bottom click on "visit page") .


Disclosure: I am long RSPU, VPU, and JXI.
@Lake OZ boater Can you give me 2 stocks in this group that are vulnerable for take over. I find the group is to diverse. Too many Cos. and should undergo consolidation.
Lake OZ boater profile picture
@Jimghad No, sorry I cannot. I don't work in- nor have any expertise in- the sector.

It is an interesting notion though. They are highly regulated monopolies in most cases, and I am sure there are many legal and regulatory issues involved.

Please keep us updated with your research and findings on the topic.
Abullman profile picture
@Jimghad Takeovers in utilities are all about size and is a very difficult process due to the regulatory environment. EVRG was the last candidate among those listed in the article that was trying to be acquired. Regulators squashed the deal.
Strangely, no mention of NEE on any lists???
Lake OZ boater profile picture

Check out this Graham Intrinsic Value calculator.

The output estimates an intrinsic value of roughly $91.00


Everyone's situation is different. The current price is $85.00. The calculator's output does not suggest much price appreciation.

IMHO: NEE is a "hold" if you acquired it at a lower cost basis, but not a lot of upside from here.

Picking individual stocks introduces idiosynchratic risk. For any new utility money, why not just consider starting a position in a broadly diversified utilities ETF like RSPU, XLU, or VPU?
Optionputter profile picture
@alphamale007 Florida is too close to high tide for me.
Abullman profile picture
As everyone who invests in utilities knows it has been a brutal stretch since interest rates have been rising. With that being said, though, it has been a great time to be adding to these positions which I have done. Once the Fed quits raising rates and considers lowering them utilities should take off.
Craig69 profile picture
The bank said its best-positioned Overweight-rated names are PG&E (PCG), Duke Energy (DUK), American Electric Power (AEP) and Pinnacle West Capital (PNW).

We like -:)
hafen profile picture
Great article, the overweights are good choices. AEP has been a personal favorite for over 60 years. It’s, currently, my largest position. With other utilities it has dropped off recently, I love the yield.
jimklawyer profile picture

Looks to me like $AEP has limited downside, perhaps closer to $70. Based in part on a Morgan Stanley research piece which said AEP had a good opportunity to decarbonize many of its electric generation facilities, I started slowly building my position in the low $90s.

Given the yield I'm inclined to accelerate my buying in the mid to low $70s. Although my major utility positions are $SO and $DUK, there's a lot to like about AEP at present.
hafen profile picture
@jimklawyer AEP has been close to my biggest position for over 60 years; it’s not the highest rated utility, but it’s my “rock”. From the 90’s to the 70’s, that’s not limited downside, but, obivously to me, interest rates aren’t helping it, I assume it’ll be fine and be back up; in the meantime, it’s all good.
Lake OZ boater profile picture
@hafen @jimklawyer Please don't shoot the messenger, but AEP somehow became very over-valued.

1. You can try the Intrinsic Value Calculator by Benjamin Graham to see how to arrive at AEP's intrinsic value.

Intrinsic value: $63.75
Current price: $77.74

IMHO: Probably a "hold" for investors who own it with a much lower cost basis, but I'd be hesitant to add any new money at the current market price.

Inputs for the calculator:
Current "normal" earnings: $3.85
Growth rate (i.e. EPS growth rate next 5 yrs): 5.2%
Current stock price: $77.74
You can find those here: finviz.com/...

Margin of safety: 'subjective'; e.g. Buffett likes 25%

Corporate bond (Aaa) yield: 5.02%
Find that here: ycharts.com/...


2. There is no standard for "fair value" for stocks, only competing theories. Most experts who have addressed the fundamental value for common stocks generally considered to be after-tax earnings, cash flow or some combination of the two and the discount rate to put these flows in present value terms. These considerations are all addressed in the Graham model.

So what about Graham's intrinsic value model shown above, i.e. is there any evidence that Graham's model provides good results? Sharing...

A few year back some finance students out here in fly-over country looked at results over a 17 years period. From the conclusion...

"Over the past seventeen years, using Graham’s formula could have netted an investor more than double, in dollar amounts, what the Dow Jones Industrial Average would have netted them. Historical performance is never an indicator of future performance, but we have compelling evidence to suggest that there is some strength in this formula."


Disclaimer: “All models are wrong, but some are useful”. George E. P. Box

3. Re: "Interest rates aren’t helping it" . The correlation of AEP to the total bond market index fund which is definitely sensitive to interest rates, is 0.3.

Source: www.portfoliovisualizer.com/...

Whenever we see a correlation, it's a good idea to square it, because 1– r2 tells you what percentage of the change in y is independent of the change in x.

Therefore, be mindful of correlations that are 0.7 or less, because 0.7 squared = 0.49.

So 1 – 0.49 = 0.51, which indicates the majority of change in y is independent of x.

The AEP-BND correlation is 0.3. Squared is 0.09.

1 - 0.09 = 0.91 . In other words. ... 91% of the changes in price of AEP is independent of the change in the total bond market index.

Hope these might provide some additional insights.

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