'Close your eyes and buy' these utilities stocks, analyst says

By Tomi Kilgore

The crisis-like selloff has boosted the SPDR utilities ETF's dividend yield to 3.8%

The crisis-like selloff in the utilities sector, resulting from the spike in interest rates, has created historically attractive buying opportunities for a number of stocks, KeyBanc Capital's Sophie Karp wrote.

In a research titled, "Utilities: Close Your Eyes and Buy (Quality)," Karp raised her rating on a handful of companies, and reiterated her bullish call on a few others.

"Given recent volatility in the utilities space, we are shaking up our ratings and price targets to reflect our current views on the space," Karp wrote in a note to clients. "We believe that the recent market selloff over the past couple of weeks...has created sufficient valuation dislocations that investors can benefit from."

Read: How rapidly rising Treasury yields are shaking up financial markets -- in 5 charts.

The Utilities Select Sector SPDR ETF XLU slumped 1.3% in midday trading Thursday, putting it on track for the lowest close since June 26, 2020.

The ETF has tumbled more than 16% since the end of July. Previous times the ETF saw bigger declines over a similar period include the height of the COVID crisis in March-April 2020 and in the midst of the financial crisis of late 2008 into early 2009.

Over the same time, the yield on the 10-year Treasury note BX:TMUBMUSD10Y has jumped by 0.76 percentage points, and closed on Oct. 3 at 4.80%, the highest yield seen since August 2007.

Also read: Utilities stocks 'decimated' by rising rates fall into uncommon trading territory, Bespoke chart shows.

The utilities ETF's selloff has lifted its dividend yield to 3.78%, which is the highest yield of the SPDR ETFs tracking the S&P 500's 11 sectors, and more than double the implied yield for the S&P 500 index SPX of 1.64%.

In the wake of the recent volatility, valuations have improved to levels not seen in over a decade (excluding the brief early-pandemic period), Karp said.

"Given the deep dislocation that we're witnessing in the space, we advise investors to focus on higher quality names, which currently can be picked up at historically low valuation, both absolute and relative to the utilities index," Karp wrote.

In the "high quality" bucket, she upgraded the stocks of CenterPoint Energy Inc. (CNP), CMS Energy Corp. (CMS) and DTE Energy Co. (DTE) to overweight from sector weight. She also reiterated her overweight ratings on the shares of Ameren Corp. (AEE), WEC Energy Group Inc. (WEC) and Xcel Energy Inc. (XEL)

Of that group, the stock trading at the lowest premium to the overall sector's average valuation multiple is DTE Energy's, based on Karp's calculations. DTE's stock also has the highest dividend yield of that group at 3.95%.

On the "value spectrum," Karp raised the rating on Entergy Corp.'s stock (ETR) to overweight from sector weight, and kept her ratings on shares of FirstEnergy Corp. (FE) and NorthWestern Energy Group Inc. (NWE) at overweight.

Entergy's stock is trading at the deepest discount to the group's average, while FirstEnergy's has the highest dividend yield at 4.89%.

-Tomi Kilgore

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10-05-23 1230ET

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