5 things utilities investors need to know

Important considerations for investors in utilities stocks from Douglas Simmons

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print

"The valuation differential between the most expensive and cheapest utilities stocks stood near an extreme at the end of March, which I think makes particular value names attractive for the longer term," says Douglas Simmons, portfolio manager of Fidelity® Select Utilities Portfolio (FSUTX).

Following are 5 considerations Simmons thinks utilities investors should keep in mind:

  1. Utilities stocks have rarely performed in line with the S&P 500® index, according to Simmons, who says the sector's return has varied from the broad market by more than 5 percentage points for roughly 80% of historical periods.
  2. Both in 2019 and early 2020, the top individual stocks within the sector were high-quality defensive names that saw expansion in their stock multiples.
  3. Valuation spreads widened "tremendously" throughout this period, Simmons says.
  4. Non-fundamental factors largely drove the performance gap, he adds. "Stocks perceived as relatively safe tended to perform well, as did investments that scored well on environmental, social, and governance metrics," Simmons explains.
  5. Looking ahead, assuming interest rates remain fairly steady, he believes earnings multiples for the most expensive utilities stocks are unlikely to expand much further.

Based on these 5 considerations, Simmons is focused on owning stocks in the sector with lower price-earnings (P/E) multiples.

As of March 31, the fund's largest investment was in Dominion Energy (D), which Simmons considered one of best-run electric utilities. He says Dominion has been investing heavily in offshore wind turbines and could benefit from federal incentives for utilities that move away from fossil fuels. He also held a substantial stake in Exelon (EXC), which he considered a "deep value play."

Fidelity® Select Utilities Portfolio held securities mentioned in this article on March 31, 2020. As of this date, Dominion Energy composed 12.71% of fund assets and Exelon composed 10.20% of fund assets.

Next steps to consider



Find stocks


Match ideas with potential investments using our Stock Screener.



5-step guide to trading


Learn what you need to know before trading the market.

A collection of current insights from our portfolio managers.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print
Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing this investment by making it available to its customers.

Past performance is no guarantee of future results.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

857246.94.0
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.