I may be coming into this conversation a little late, but does someone here think that utilities will be able to see earnings gains of 25 to 30%? Or is this gains in appreciation in the value of the utility stock minus dividends? Or does this include dividends?
Much of the recent gain in utilities has been because of investors move to more defensive issues where they can ride out this correction. Right now, the investors who are sitting out this consolidating market through the purchase of utilities will move back into the stock market. When investors do move back into the stock market, the defensive issues will get hit, and this includes the utilities stock. Add to this the prospect of rising interest rates in 1998 along with the possibilities for inflation, and you have a formula for an upcoming correction and continued weakness in utilitiy stocks. This is because the value of many utilities is determined by the stock's dividend yield in relationship to prevailing interest rates. Do not forget about the ongoing deregulation of the Utility industry and the impact on earnings that this will portend, at least from what little I have heard about it.
If you were going to capitalize on utility stocks, that opportunity IMO has already come and gone. You have already had your 30% exceptional gain which happened this last year in 1997, and you have had a 50% gain over the longer term since 1994, at least using the DJUA as a guide. To think you will see another 25% to 30% gain in 1998 is being IMO just a little optimistic to say the least.
As far as I have always know it to be, utilities are a defensive strategy during weak markets, and also an avenue to the generation of quarterly income. Utilities are not growth stocks. Utilities do not make good value investments over the longer term. I do not understand why this has changed. Have I missed something here? I think there are much better ways in making money with a very manageable level of risk.
I will be working on a few positive posts in the near future. :)
Bob Graham |
