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Feb 13

Do Not Pass Go, Buy Utilities

Utilities

Whenever I played Monopoly as a child I would always pass on buying the Utilities. Their lack of appeal was likely a combination of having little identity or brand, they were bland with no color and just text, you couldn’t put houses or hotels on them, and calculating what they were potentially worth was seemingly arduous (if one is owned rent is 4 times number shown on dice, it both owned 10 times).

Now playing as an adult, grabbing the Utilities (and the Railway Stations) is something I readily do, the passive income without the need for further investment is very appealing, and with an average roll of 7, having one or both can pay for itself after 5 or 6 rents. Not bad.

As a trader and investor I’ve learnt to look beyond the exciting and glamorous too. Trends may show themselves more readily to a wider audience in growth stocks or the higher beta areas of the market, but it can often be beneficial to cast your net wide in order to find sustainable trends whatever the market profile.

Right now that net has brought several utility stocks to the surface.

Looking at the whole sector via the Utilities SPDR ETF ($XLU) we can see the uptrend is just starting to take hold, we’ve scaled a descending trendline, and cleared the major MA’s, all with some reasonable volume.

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It’s also interesting to see the strength utilities have shown relative to bonds ($XLU/$TLT), breaking out of a year-long consolidation. We wrote about the signal we got to short bonds in our long-term trend following system, and if rotation out of bonds gets underway in earnest then the attractive yield and comparative safety of utilities could easily serve as an attractive home for capital wary of an overbought equity market.

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For those that prefer the ETF angle I could happily own $XLU, and given we are already short bonds the Short $TLT, Long $XLU trade is also an attractive proposition and worth considering.

For individual equity names however, the four that make most appeal and I want to be long here are $AEE, $D, $SRE, $WEC.

Ameren Corp ($AEE)

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Dominion Resources ($D)

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Sempra Energy ($SRE)

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Wisconsin Energy ($WEC)

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