The Utilities Selloff Has Gotten Out of Hand. This One Stock Is Selling at an ‘Absurd’ Price.
Utility stocks keep getting slammed this year. That’s leaving investors with opportunities—such as the cheap Avista .
The Utilities Select Sector SPDR exchange-traded fund (ticker: XLU), down 12% during the past 12 months, has fallen out of favor with investors this year. First, they were dumped for being safe stocks as investors abandoned recession fears and embraced riskier fare. Higher rates also made utilities’ dividend yields less attractive. More recently, wildfires in Hawaii and elsewhere have raised the possibility of legal liabilities for utility companies, another pressure point on their shares.
The selling has gotten out of hand. The Utilities ETF trades for less than 16 times 12-month forward earnings, down from around 20.41 one year ago and its lowest since April 2020. It also trades at a discount to the S&P 500 index, when it typically trades at a premium. Utilities don’t get much cheaper than that.
Concerns about utilities are overblown, and their earnings could be much stronger than expected. The companies are adding clean-energy power plants faster than they’re retiring old ones. That allows them to grow their “rate base,” a boon for profits because states typically allow them to earn a fixed return on the equity of those assets.
In other words, as assets grow, so do earnings.
You can’t go wrong with the Utilities ETF, which spreads the risk among 30 stocks and charges a 0.1% management fee. But for investors looking for a single stock, Avista (AVA), down more than 25% this year, is particularly cheap. It trades for about 13.7 times earnings, its lowest multiple in more than 10 years.
There are a few factors holding back the stock—factors that should start reversing soon. For the past few years, the company was less aggressive in requesting rate base increases as it sought to sell itself to Canadian utility Hydro One (H.Canada). Regulators denied the deal, and a stand-alone Avista, which operates in Washington, Idaho, and Oregon, has some catching up to do. Analysts expect total assets to grow a mere 3% this year to just under $7.7 billion, with return on equity creeping higher to 7.1%, though that’s still under the 10.3% seen in 2019.