Sector Analysis 3Q16

The Utilities sector ranks last out of the ten sectors as detailed in our 3Q16 Sector Ratings for ETFs and Mutual Funds report. Last quarter, the Utilities sector ranked ninth. It gets our Very Dangerous rating, which is based on an aggregation of ratings of nine ETFs and 32 mutual funds in the Utilities sector as of July 15, 2016. See a recap of our 2Q16 Sector Ratings here.

Figure 1 ranks from best to worst all nine Utilities ETFs and Figure 2 shows the five best and worst rated Utilities mutual funds. Not all Utilities sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 250). This variation creates drastically different investment implications and, therefore, ratings.

Investors should not buy any Utilities ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this sector, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off.

Figure 1: ETFs with the Best & Worst Ratings – Top 5


* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5


* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

ICON Utilities Fund (ICTUX) is excluded from Figure 2 because its total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

Fidelity MSCI Utilities Index ETF (FUTY) is the top-rated Utilities ETF and Wells Fargo Utility & Telecommunications Fund (EVUYX) is the top-rated Utilities mutual fund. FUTY earns a Dangerous rating and EVUYX earns a Neutral rating.

First Trust Utilities AlphaDEX Fund (FXU) is the worst rated Utilities ETF and Rydex Utilities Fund (RYUTX) is the worst rated Utilities mutual fund. Both earn a Very Dangerous rating.

75 stocks of the 3000+ we cover are classified as Utilities stocks.

There are no Utilities stocks under coverage that receive an Attractive-or-better rating. UGI Corporation (UGI: $45/share) is one of only four Neutral rated stocks. Over the last decade, UGI has grown after-tax profit (NOPAT) by 10% compounded annually. The company earned a 7% return on invested capital (ROIC) over the last twelve months, which is up from 4% in 2012. While the market has recognized this consistent growth in profits, UGI’s current valuation leaves more room for upside than other stocks in the sector. At its current price of $45/share, UGI has a price-to-economic book value (PEBV) ratio of 1.2. This ratio means that the market expects UGI’s NOPAT to grow by 20% over the remaining life of the corporation. This expectation could seem low given UGI’s 10% compound annual growth rate in profits over the past decade. If UGI can grow NOPAT by 6% compounded annually for the next decade, the stock is worth $55/share today – a 22% upside.

WGL Holdings (WGL: $71/share) is one of our least favorite stocks held by Utilities ETFs and mutual funds and earns a Dangerous rating. WGL’s economic earnings have declined from -$25 million in 2005 to -$54 million in 2015. Over the last twelve months, economic earnings have fallen even further to -$59 million. The company’s ROIC has fallen from 6% in 2005 to a bottom-quintile 4% over the last twelve months. Despite a history of shareholder destruction, WGL is priced for significant profit growth. To justify its current price of $71/share, WGL must grow NOPAT by 8% compounded annually for the next 11 years. For reference, this scenario assumes more than double WGL’s NOPAT growth over the past decade, which only highlights the optimistic expectations already baked into the stock price.

Figures 3 and 4 show the rating landscape of all Utilities ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst ETFs


Sources: New Constructs, LLC and company filings

Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds


Sources: New Constructs, LLC and company filings

This article originally published here on July 18, 2016.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme.

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Photo Credit: Chris Blakeley (Flickr)