Despite a worsening pandemic that could challenge a full economic recovery, utilities stocks are doing more than just keeping the lights on. Douglas Simmons, portfolio manager of Fidelity® Select Utilities Portfolio (FSUTX), says power companies remain attractive based on valuations, long-term secular trends, and their defensive characteristics.
“This is a sector that’s lost little to no economic or business value because of the coronavirus pandemic,” he says.
Recession-related weakness among commercial and industrial customers of utility providers largely has been offset by higher-margin residential usage, he adds. Moreover, most utilities have affirmed their 2020 earnings guidance and nearly all affirmed their long-term growth rates, according to Simmons.
Simmons says the sector seems to be forgotten amid fervor for momentum stocks, tech shares, and specific economic recovery plays.
It’s not clear how many of the current winners would fare if corporate taxes increased.
Utilities could gain if taxes go up because this would be cash-flow accretive for the sector as a whole, and more supportive of renewable energy policy—the latter of which could result in faster earnings growth.
As of the end of the third quarter, Simmons says he’s constructive on utilities because they’ve been generating a double-digit total return, but with low valuations and amid an environment of low interest rates. He also sees the sector potentially benefitting long-term from a transition to renewable energy sources and away from coal and oil.
As of September 30, the fund held large stakes in regulated, more defensive electric utilities, including NextEra Energy (NEE).
In addition, Simmons has added to several stocks in recent months, including multi-utility CenterPoint Energy (CNP), which he considered a compelling value with an activist shareholder pushing for changes that could benefit the company.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
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