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Utility Stocks: Best Buy in Stocks Right Now

The Utility Sector has Lagged for Years...

Written by Brian Hicks
Posted September 26, 2011

That's About to Change

I just told my folks to buy stocks.

It sounds crazy right now, I know. Especially if you know my parents...

They aren’t wild speculators; they worked hard for their money. Losing any of it in stocks or bonds is emotionally crushing for them. So with the exceptions of a few times like late 2008 and early 2009, I normally advise them to stay out of stocks completely.

But for the first time in a long time, I’ve recommended they buy stocks again. Not indiscriminately or anything like that, though...

In the past two months, we’ve got a major encouraging sign from one “boring” sector that’s paying high yields and has the most upside potential in years.

You've Got to Love What Everyone Hates

Right now, it seems like everything has fallen out of favor. Even gold and energy sectors have finally taken their licks.

But there’s one sector that’s nearly perfect right now. It just doesn’t get much better.

It’s paying a healthy dividend. The entire sector's average yield is 80% higher than the S&P 500 and nearly twice as high as the 10-year U.S. T-bond. Some individual stocks in it are nearly twice as high.

It’s a capital-intensive business. All the leaders have a high percentage of fixed assets, which makes them a rarely-considered safe haven against the dollar when its long-run decline resumes. And it benefits from falling interest rates and falling oil prices, which is what we have now.

It’s certainly a “boring” sector that will have you resting easy at night.

And the government is on their side to boot. They’re actually benefitting from some of the most economically damaging regulations out of Washington.

Best of all, expectations are so low for it right now that there’s minimal downside risk. It has been one of worst-performing sectors since the rally began in 2009. The entire sector was so beat up before the current downturn, it’s down a mere 2% in the last two months, while the S&P 500 is down nearly 20%.

This sector has it all.

And history says it’s time to buy now.

Time to Buy the Cheapest Sector in the Markets

The cheapest sector in the markets today and the one I’m recommending for my ultra-conservative parents is utilities.

Utilities aren't sexy. And they're so out of favor, no one wants them.

But I believe that’s all about to change.

We’re seeing the first signs of the changing sentiment already...

The performance of the iShares Dow Jones Utilities ETF (NYSE: IDU) has been one of the few safe havens during the entire correction over the last two months.

The chart below shows the Utilities Sector ETF (blue line) is actually up since late July, while the S&P 500 (red line) has fallen nearly 10%:

 Utility Stocs vs SP 500

But that relatively stellar performance is part of a much bigger trend in utility stocks and the market as a whole.

My Favorite Indicator Signals “Buy Utilities”

Sector weight analysis has long been one of my most important indicators to help predict major sector moves. It predicted the banking crisis, oil price collapse, dot-com bust, and every other major market turning point for decades. It can help pinpoint rock-bottom lows and the starting points for long-term mega-growth trends as well.

Sector weight analysis is simple: You just break the stock market down into categories or sectors, then see how much they are bought in comparison to one another.

For example, in 1980 at the height of the oil and commodities boom, energy sector stocks made up 25% of the S&P 500′s total value. At the time, oil prices were setting new highs and investors were flocking to oil stocks.

They bid energy stocks up to the point where they made up one quarter of the entire S&P 500. It didn’t last.

The same is true for the financial sector. Financial services made up a lowly 6% of the S&P 500 in 1980. After two decades of across-the-board double-digit earnings growth (we are now seeing how they made those earnings), they formed kind of a “silent bubble” and accounted for more than 20% of the S&P 500 in the past few years.

Now, [the same "silent bubble"] has burst and financial sector stocks, as a percentage of the S&P 500, are working their way back to historical norms.

Then there are tech stocks. During the height of the tech bubble in 2000, the technology sector made up 30% of the S&P 500 — again, completely unsustainable.

The table below breaks down sector weightings over the past three decades:

 Utility Stocks SP 500 Weight

The table reveals all sorts of helpful bits to help guide prudent investors.

The bubble tops (red) came when a sector’s total value made up a disproportionate amount of the overall index; the rock bottoms (green) came when a sector made a disproportionately small amount of the overall index.

In the case of utilities — which will never be a bubble-type sector — the best way to analyze it is the overall weight in the index. When it’s high, as it was in 1990, it’s time to sell. When it’s low — like right now — it’s time to buy.

Only One Way to Go: UP!

In the case for buying utilities, this is just one reason.

There are still very high yields and increased government involvement in the form of regulation and multi-billion dollar subsidies that will help utility stocks weather this and future market storms.

Later this week, Freedom & Capital readers will learn all about the many more reasons a select handful of utility stocks are going to soar in the months and years ahead.

Utility stocks have been out of favor for a long time. But their inherent features of safety, high dividends, low valuations, and consistent returns over the years are about to become much more attractive in current market conditions.

We’re already starting to see utilities pick up a lot of momentum compared to the overall markets...

Investors are already realizing their potential as one the few safe havens — and earning some decent income as the crisis du jour blows over.

If utilities’ recent strength is any indicator, this traditionally boring sector is about to get much more exciting.

Good investing,

 Andrew Mickey Signature

Andrew Mickey
Editor, Wealth Daily

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