By Bryan Perry

March 3, 2020

Last week, the S&P 500 suffered its biggest one-week loss since the 2008 financial crisis, surrendering 11.5% in value. It was especially bloody for investors heavily weighted in energy and financials, as plummeting demand for crude in China and record low Treasury yields crushed the energy sector by -15.4% and the financial sector by -13.5%. Even if there weren’t a noticeable pandemic in the world of the Covid-19 virus, there sure was a full-blown panic among investors and trading desks around the globe.

Weekly Sector Performance

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

What was most notable to me is that when panic selling sets in, no sector is left intact. The fact that the utility sector shed nearly 12% is the kind of capitulation last seen in early 2009, when investors sold “the good stuff” out of sheer panic-stricken fear. Last Friday’s session took the Utilities Select Sector SPDR ETF (XLU) knifing down through its 200-day moving average on a towering 92.27 million shares traded.

Below is a 3-year chart of the XLU where the sell-off briefly violated the 20-week moving average (blue line) before closing right on trend. Clearly, the utility sector was trading way over its skis on a purely technical basis if not valuations as well. The price action last Wednesday, Thursday, and Friday was not just incredible – it was irrational. Alan Greenspan coined the phrase “irrational exuberance” in 1996, but what we saw in the utility sector last week was “irrational hysteria.” Shares of XU now yield 3.07%.

S&P 500 Utilities Sector

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

While the growth of renewable energy is admirable, all the solar, wind, geothermal, hydro, biomass, and wood pellet sources combined account for about 15% of total power produced from utilities. Natural gas is the fuel of choice for most utilities, soaking up roughly 35% of all domestic natural gas production.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As power companies move away from coal, the cheapest replacement that can scale to meet the demands of end markets is natural gas. Renewables have a long way to go before passing natural gas as the go-to future fuel for now. It’s clean, it’s in abundant supply inside U.S. borders, and it is super cheap. The price of natural gas has fallen to below $1.70/MMBtu, a level not seen since March 2016.

1.68 USD?MMBtu

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

When the largest and most important input to your business is trading at historic lows, it stands to reason that business conditions are not just stable but have a sizeable tailwind. If you’re an operator of an electric utility, you are locking in long-term forward gas contracts the size of Texas with prices down at these levels. This situation is like running a coffee shop when the cost of coffee beans was just cut in half.

And here’s another bullish factor waiting in the wings. The supply of electric vehicles hitting the road is about to climb into the millions in the next few years. Home charging and commercial charging stations are going to be a huge growth driver for electric utilities. It’s quite an investment proposition and one that is now on sale, courtesy of “the coronavirus correction.”

Investors seeking a yield that’s at least two times that of the 10-year Treasury, generated from qualified dividend income that doesn’t have any currency or foreign market risk need look no further than the U.S. utility sector. Within the XLU ETF, there are several stock holdings that yield over 4%. Last week’s panic-driven price drop is giving investors a window of opportunity that will likely close quickly.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Ultra-Low Treasury Yields are a “Screaming Buy” for Stocks

Income Mail by Bryan Perry
Power Play for Income Makes Perfect Sense

Growth Mail by Gary Alexander
The Media Make Bad News Sound Worse

Global Mail by Ivan Martchev
A Hitchhiker’s Guide to Coronavirus

Sector Spotlight by Jason Bodner
Panic Selling Rocks Markets…What to Do Next

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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