Dow utilities remain 'buy' rated
Almost all sectors are overvalued as a result of the ongoing market rally, but a number of utility stocks still show solid upside potential.
The Dow utility average gained momentum in mid-March as transports and small caps set tradable highs. Utility strength continued into April as Dow industrials and S&P 500 ($INX) set interim highs on April 11. While the major equity averages hesitated, utilities continued to a high at 537.86 into April 30, up 18.7% year to date at that time versus a 12.0% gain for the S&P 500. Today the utility average is up 12.7% year to date with the S&P 500 up 14.6%.
The main reason for this rotation was that the Dow utility average became extremely overbought on its weekly chart. At the high the 12x3x3 weekly slow stochastic reading was 97.23 on a scale of zero to 100, where readings above 80 are overbought.
The Dow utility average peaked between its quarterly pivot at 524.17 and its annual risky level at 540.37 then tested its monthly pivot at $509.53 on Friday and Monday. You can trade the utilities sector using the Utilities Select Sector SPDR Fund (XLU) ($39.62). Note that XLU has held its 50-day simple moving average at $39.46 with my monthly value level just below at $39.09. After testing $41.44 on April 30, XLU was pulled back down due to the power of the annual and quarterly pivots at $40.52 and $40.27. My semiannual value level is $36.48 with an annual risky level at $43.47.
The U.S. equity markets continues to trade under the cloud of a ValuEngine valuation warning with 68.6% of all stocks overvalued, 29.8% overvalued by 20% or more. We continue to show that 15 of 16 sectors are overvalued, 14 by double-digit percentages including the utilities sector overvalued by 10.5%.
The utilities sector contains 215 companies with 62 strong buy rated stocks and 127 buy rated stocks. With 87.9% of all utilities stocks rated buy, the sector maintains its overweight rating.
On April 2 I wrote on TheStreet, Dow Utilities Outperform S&P 500 in First Quarter and the sector momentum continued until April 30. Not much has changed as ratings among the 15 stocks profiled remain the same; one strong buy rated stock, 13 buy rated stocks and one hold rated stock. Here's my update for May.
OV/UN valued: On April 2 three stocks in the Dow utility average were undervalued, today two are just slightly undervalued. Nine are overvalued by double-digit percentages. 'Hold'-rated Williams Companies (WMB) is the most overvalued by 56.7%.
VE rating: The only "5-Engine" or strong 'buy' rated stock remains AES (AES).
Last 12-month return (%): Only two Dow utility stocks declined over the last 12 months with First Energy (FE) the biggest loser down 11% followed by Exelon (EXC) down by 10%. The biggest winner over the last 12 months is American Electric Power (AEP) with a gain of 27.2%.
Forecast one-year return: Only Williams Companies shows downside risk over the next 12 months with a projected slippage of 3.2%. The other 14 stocks are projected to gain between 8.5% and 12.3% over the next 12 months, led by AES.
12-month trailing P/E ratios: Sector price-to-earnings ratios have become elevated between 12.9 and 39.4.
200-day simple moving averages: Only First Energy is trading below its 200-day. This means that the other 14 stocks are at risk of reversion to the mean.
Recent high/date of high: Each of the 15 Dow utilities stocks set highs for the move between April 23 and May 8 with 11 peaking on April 30 or May 1.
Here's how to use the value levels and risky levels for stocks in today's table:
Value level: is the price at which to enter a GTC Limit Order to buy on weakness. The letters mean; W-Weekly, M-Monthly, Q-Quarterly, S-Semiannual and A- Annual.
Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.
Risky level: is the price at which to enter a GTC Limit Order to sell on strength.
At the time of publication the author held no positions in any of the stocks mentioned.
More from TheStreet.com
Copyright © 2014 Microsoft. All rights reserved.
These hot movers could rise by double digits in coming months.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.