The stock market has rebounded nicely now, thanks to the rally in oil prices and a positive set of data, particularly the jobs report that speaks of a recovering U.S. economy. Yet, investors can’t overlook the sharp sell-off seen earlier this year along with first-quarter earnings gloominess and feeble global growth. And until the 2016 presidential elections are over, volatility is also most likely to stay.
Hedge Against Uncertainty
Under such circumstances, selecting utility stocks will be a prudent choice given the sector’s defensive characteristics. Moreover, the soft approach of the Federal Reserve to rate hikes gives the utilities some respite. The Fed kept the short-term interest rate steady in the 0.25–0.50% band and indicated that only two rate hikes are likely for the year. At the end of the Federal Open Market Committee’s March meeting, the central bank announced that it now expects the federal funds rate to rise to 0.875% by the end of the year compared with its earlier expectation of 1.375% that took into account four hikes.
As a result, utilities as a whole are expected to benefit from a low-rate scenario in the near term, as higher rates would have raised their financing costs and reduced their plea as dividend investments. The sector is a safe bet providing investors with steady returns in an otherwise volatile market.
In fact, the Dow Jones Utility Average index gained 14.02% year to date compared with a 0.45% gain for the Dow and a 0.35% decline for the S&P 500. This mostly portrays the Fed’s assurance that future interest-rate increases will be gradual.
Importantly, utility stocks with a low beta make for a judicious approach at this time. Beta, also known as the beta coefficient, measures the volatility of a stock in contrast to broader markets. It measures the extent to which a stock’s return may be affected or how much the price can fluctuate owing to market conditions. Stocks having a beta ranging from 0 to 1 mainly show less volatility than the broader markets.
So, risk-averse investors would prefer to neutralize losses with low correlation stocks as they are less prone to day-to-day fluctuations. For these investors, we have handpicked 4 low-beta stocks that also carry a favorable rank, making them potential investment options. These stocks carry either a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) as we expect them to outperform their peers in the future.
For further screening, investors may opt for a comprehensive Zacks Style Score or VGM score that will allow them to better choose winning stocks. Stocks with a VGM (‘V’ for Value, ‘G’ for Growth and ‘M’ for Momentum) score of A or B and a Zacks Rank of #1 or #2 have even better returns, on average, than if the individual components are taken into consideration, as it considers three times as many items that are correlated to future stock returns. This is perfect for investors who aren’t ready to compromise on one aspect for the sake of the other.
Our Choices
Below we have discussed four utility stocks that meet the above criteria. These stocks have a Zacks Rank #1 or 2, with low beta and a VGM score of “B”.
