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By Travis Miller | 07-28-2015 02:00 PM

Opportunities Emerge in Beaten-Down Utilities

After a rough start to 2015, high-quality utilities such as ITC Holdings, Southern Company, and Duke Energy are trading at attractive valuations.

Travis Miller: The utilities sector has had a rough start to 2015. Between January and June as rates rose from 1.7% to 2.3%, the sector had one of its worst six-month performances ever--down 14%. We think this has opened up some opportunities for investors in the sector. We went from the sector being 19% overvalued during that period at the beginning of the year to now being fairly valued, with several high-quality names that we think are trading at discounts to fair value.

One of our favorites right now is ITC Holdings (ITC). It's our only wide-moat utility on the regulated side. We think it's trading at a 20% discount right now to fair value. It's a pure play on wide-moat transmission assets, and we think it will be one of the top dividend growers in the sector over the next four years. We're looking at double-digit dividend growth even after the company raised its dividend 14% last year.

Another favorite is Southern Company (SO). It's trading at one of the cheapest valuations since the 2008-09 market crash. It's a high-quality name with many, many billions of dollars of investment available to grow dividends and earnings, and trading at 5% yield with what we think will be 4% annual earnings and dividend growth.

A third high-quality name is the largest utility in the U.S., Duke Energy (DUK). We see, again, a 4.5% yield for this with total returns very similar to Southern Company, with 5% earnings growth behind $40 billion of investment in the next five years in infrastructure.

The utilities sector has had a rough 2015, but we do think there are opportunities now for income investors and utilities investors looking for good deals. 

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