Tags: power | utility | stocks | shares

Power Drain: Sell Utility Stocks Now

By    |   Thursday, 30 Jan 2014 07:21 PM

Investors seeking income and safety have often turned to utility stocks.

Dividend yields for this sector are almost always higher than the income available from index funds. Earnings are thought to be almost recession-proof since demand for utility services, including electricity or natural gas, might not grow in a recession but there will always be some demand from consumers and businesses.

Utilities are also regulated by state and local governments and many investors assume regulators will ensure the companies are financially sound.

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An indicator used by quantitative market analysts indicates that utilities are not safe at this time.

Quantitative analysts use statistical models to find investment opportunities. Their tools also highlight stocks and sectors to avoid.

Financial soundness can be quantified with the Z-Score, which was first published in 1969 and was designed to predict whether or not a company will enter bankruptcy within the next two years. A 1999 study found that 72 percent of the companies identified as bankruptcy candidates did end up in bankruptcy.

Current Z-Score values show that 21 of the 33 utilities in the S&P 500 could be headed for bankruptcy.

The Z-Score indicates that many utilities are not safe and while they may not end up in bankruptcy, investors should realize that dividends might not be safe. If a company is forced to cut its dividend, the stock price often falls and puts an investor’s capital at risk.

Utilities, as a group, are showing signs of financial stress and investors seeking income and safety should consider avoiding this sector.

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MichaelCarr
Investors seeking income and safety have often turned to utility stocks.
power,utility,stocks,shares
275
2014-21-30
Thursday, 30 Jan 2014 07:21 PM
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