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Utilities
| The Utilities Sector encompasses those companies considered electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power. |
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Actual market weightings for each sector are based on the S&P 1500.
**The Market Analysis, Research and Education (MARE) group is a unit of Fidelity Management & Research LLC.
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Sector Commentary from Standard & Poor's
11/15/2009
S&P recommends underweighting the S&P 500 Utilities sector. Year to date through October 23, the S&P Utilities Index, which represented 3.7% of the S&P 500 Index, rose 1.1%, versus a 19.5% increase for the S&P 500. In 2008, this sector index was down 31.5%, versus a 38.5% decrease for the 500. There are four sub-industry indices in this sector, with Electric Utilities being the largest, at 55.5% of the sector's market value.
S&P has a neutral fundamental outlook for the S&P 500 Utilities sector, reflecting our neutral view on several of the sub-industries, including Electric Utilities, which represents over half of the sector. While earnings in 2009 have been restricted by the weak economy, some of the mainly electric distribution utilities have benefited from rate increases and lower fuel costs. Utilities with major wholesale power operations, however, have seen expired power contracts replaced with higher-margin contracts, but this has been offset by a decrease in demand. The sector trades at a P/E on estimated 2010 earnings of 11.7X, below the 14.6X we see for the S&P 500. Its P/E-to-projected five-year EPS growth rate (PEG) ratio of 1.9X is above the market's PEG ratio of 1.5X. This sector's S&P STARS average of 3.7 (out of 5.0) in line with the 3.7 average for the S&P 500.
The S&P GICS Utilities Index has rallied right up to the top of a very large base that started in October, and a breakout above the 155 level would finally turn the longer-term trend back to bullish from neutral, in our view. If the breakout occurs, there is very little chart resistance immediately overhead, so we think prices would have a lot of room to run. The 17-week exponential moving average is very close to breaking above the 43-week exponential average. Bearishly, relative strength versus the S&P 500 is still in a downtrend. We have raised our technical opinion on Utilities to neutral with a bearish bias, from bearish.
In summary, we believe an ongoing domestic economic recovery will continue to fuel cyclical outperformance at the expense of this counter-cyclical sector. While the sector's dividend yield is above the broader market's, we think that is unlikely to be enough of a positive offset to prevent continued underperformance.