Is it Time to Power Up with Con Edison (ED)?
Back in May, when the S&P 500 Index was sucking wind, dropping almost 7% from its April high, I suggested that skittish investors consider seeking safety in the utilities sector.
And safety is precisely what utilities delivered.
Right up until Hurricane Sandy’s landfall in the Northeast last week, the company I singled out for you, Consolidated Edison (NYSE: ED) didn’t budge an inch to the downside. In fact, the stock rose about 1%.
What’s more, the broader ETF I suggested, the Utilities Select Sector SPDR (NYSE: XLU), rose 4%.
Add in dividends and both investments were up 1.7% and 6.7%, respectively.
Like I said, for about five months running, utilities delivered safety.
Most recently, though, they’ve been anything but safe.
Take FirstEnergy (NYSE: FE) and Exelon (NYSE: EXC), for example. Over the last five days, shares are down 8.2% and 10.3%, respectively. Even the oldest and most reliable utilities company around, Con Ed, is off 4%.
And the S&P 500 Index is actually flat over the same period. So we can’t blame normal market volatility for the selloff. It’s something sector specific.
Of course, it doesn’t take the deductive reasoning skills of Sherlock Holmes to put a finger on the cause. The underperformance is due to the widespread power outages left in the wake of Hurricane Sandy.
When your company gets paid based on usage, and the power’s out, it’s hard to make money. Investors are responding accordingly by bailing on utilities stocks.
But are the masses making the right move? Of course not! They never do. And here’s why the current situation is no different…
Long Term Means Long Term
By no means do I want to diminish the impact of Hurricane Sandy. It’s a costly, far-reaching and tragic storm.
But the long-term business impact on utilities is limited. After all, customers can’t take their business elsewhere. And power must be restored. In fact, as I write, 86.4% of customers have been reconnected, based on Department of Energy (DOE) data.
So while utilities might suffer a hit to earnings in the short term, the long-term impact promises to be negligible.
If you don’t believe me, consider recent history.
Last year, Hurricane Irene knocked out power to 8.4 million customers in 13 states, according to the DOE. In comparison, Hurricane Sandy knocked out power to 8.5 million customers across 21 states.
In other words, the severity of the power outages is about equal, allowing us to make an apples-to-apples comparison.
So how did utilities stocks react in the aftermath of Irene? It was barely a blip on the radar.
After a brief pullback – and by brief, I mean a few days – the utilities sector and Con Ed got back to their winning ways. Take a look:
So why are investors reacting as if Sandy is going to have a longer lasting – and potentially permanent – impact on utilities stocks?
The only logical explanation is that Sandy garnered much more media attention than Irene. It even put the presidential election campaign on hold. And, in turn, the increased coverage magnified the investment response.
We should treat this as a buying opportunity and not as a warning sign to get out of the sector.
That being said, don’t rush in just yet.
A nor’easter is forecast to hit the Northeast on Wednesday and last into Thursday, according to AccuWeather.com. Sadly, the rain, wind and freezing temperatures could cause additional power outages.
No doubt, the double-whammy is going to spook even more investors out of the sector. So, come the end of the week, the opportunity could be more attractive.
Bottom line: When we’re talking about long-term investments, we can’t put undue importance on short-term events. It’s the long-term potential that matters.
With a dividend yield of 4.1%, a safe dividend payout ratio of 66.7%, a reasonable valuation of 12.8 times forward earnings and a 38-year history of increasing its payouts, Con Ed remains a compelling long-term investment.
So wait for the Chicken Littles to scare a few more investors out of the stock. Then look to be a contrarian and enter a position. Specifically, I’d look to start accumulating shares for less than $55.