After months of political uncertainty, the American economy is somewhat back on track now. The second estimate for GDP shows that the U.S. economy grew 3.2% in the third quarter, faring better than the first estimate of 2.9% and the second quarter’s 1.4%.
Moreover, inflation is edging toward the desired 2% while the job market is looking up. These factors set the stage for an interest rate hike by the Federal Reserve this December — a move that has been highly anticipated for months now.
Trump’s victory in the Presidential race, despite the initial tremors, brought about a turnaround in the U.S. market, providing an impetus to the dollar as well as most sectors. The S&P 500 has gained 1.6% since election day.
What's even more encouraging is a historic deal signed by the Organization of the Petroleum Exporting Countries (OPEC) to cut about 1.2 million barrels of oil output a day by January in an attempt to counter the supply glut that has been plaguing the oil and gas industry for the last two years.
But in spite of these positives, not all is well for the utility sector. Companies in this space are characterized by their capital-intensive nature as they require huge investments for setting up generation facilities, and transmission and distribution infrastructure.
While these companies have been benefitting from the low interest rate environment so far, the possibility of a rate hike in the near term makes this sector far less appealing. This is because the resulting increase in cost of capital would increase cost of operations of the utilities, thereby reducing their profitability. Utilities might have to lower dividends and suspend share buybacks to cope up with the new challenges.
Stringent regulations and clean-emission standards have been hurting utilities as they have to retire, idle or shut down coal-based power plants and/or install emission control technology at their generating stations. As per a report by the Energy Information Administration, 94 coal-based plants were closed in 2015 and another 41 are expected to be winded down this year.
In such a scenario, Trump’s election campaign in favor of fossil fuel offers some hope to investors. His policies may call for the rollback of the Clean Power Plan and other decarbonization regulations, which have been hurting utilities for quite some time now. However, all these are still speculations, as utilities continue to reel under intense regulatory pressure.
5 Stocks to Avoid
Here, we have handpicked five stocks with the help of our new style score system. All these stocks have the combination of a D or lower VGM score and a Zacks Rank #4(Sell) or #5 (Strong Sell). Note that a low VGM score indicates dismal performance potential for the stock.
Empresa Distribuidora y Comercializadora Norte S.A. EDN is the largest electricity distribution company in Argentina in terms of number of customers and electricity sold (both on the basis of GWh and Pesos). The stock has a VGM score of “F” and a Zacks Rank #4. It has witnessed one downward estimate revision for 2016 over the last 60 days.
Chesapeake Utilities Corp. CPK is a utility company engaged in natural gas distribution and transmission, propane distribution and marketing, advanced information services and other related businesses. The stock has a VGM score of “D” and a Zacks Rank #5. It has witnessed two downward estimate revisions for 2016 over the last 60 days.
Telstra Corporation Ltd. TLSYY is the principal telecommunications company in Australia. The stock has a VGM score of “F” and a Zacks Rank #5. It has witnessed one downward estimate revision for 2016 over the last 60 days.
Chunghwa Telecom Co., Ltd. CHT is the largest telecommunications service provider in Taiwan. The stock has a VGM score of “F” and a Zacks Rank #4. It has witnessed one downward estimate revision for 2016 over the last 60 days.
Shenandoah Telecommunications Company SHEN is a holding company that provides a broad range of telecommunications services through its operating subsidiaries. The stock has a VGM score of “F” and a Zacks Rank #4. It has witnessed one downward estimate revision for 2016 over the last 60 days.
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