Investors Seek Refuge in Utilities as Trade War Escalates

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Investors Seek Refuge in Utilities as Trade War Escalates

Just when investors were becoming complacent about a settlement to the year-long trade war between the United States and China, both nations levied a slew of fresh tariffs, thus killing any chance of a compromise being reached anytime soon.

Washington took the first step on Friday, raising tariffs from 10% to 25% on $200 billion in Chinese imports. Beijing countered Monday by threatening to raise tariffs on $60 billion in US goods. President Trump responded by beginning the process of imposing tariffs on Chinese products worth an extra $300 billion, implying that nearly all Chinese goods coming into the United States will face duties.

The resumption of a full-fledged tariff war between the world’s two economic heavyweights has sent markets tumbling over the last week, with sectors with the biggest exposure to China, such as industrials and technology, taking the worst of the damage. In contrast, the utilities sector has witnessed substantial buying activity as investors seek sanctuary in firms that produce the majority of their income domestically.

“Tariffs will have no direct influence on utility sales or profitability. Even if tariffs raise steel prices or other material costs, utilities are likely to recoup those costs from consumers “Bloomberg quotes John Bartlett, co-portfolio manager of the Reaves Utility Income Fund.

Those looking for a safe-haven stocks bet during the developing trade war can consider these trading ideas, which focus on three dependable utility firms.

American Electric Power Company, Inc. (AEP)

The American Electric Power Company, Inc. (AEP), founded in 1906, distributes energy to retail and wholesale clients in the United States. It creates electricity via the use of coal, natural gas, renewable energy, and nuclear power. The Columbus, Ohio-based firm reported $1.19 earnings per share (EPS) in the first quarter, handily above analysts’ forecasts of $1.10. When compared to the same quarter previous year, its bottom line increased by 24%. American Electric maintained its 2019 operating profits projection of $4.00 to $4.20 per share and anticipates ongoing earnings growth from investments in regulated industries. As of May 14, 2019, the company was trading at $86.34 with a market value of $42.60 billion and a dividend yield of 3.13%, up 17.31% year to date (YTD).

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Following months of trading in a tight three-point range, American Electric’s share price rose significantly from the 50-day simple moving average (SMA) in Friday’s trading session and maintained its drive higher Monday, printing a new all-time high. The relative strength index (RSI) is still below overbought zone, indicating that the stock has opportunity to rise before stabilizing. Those that trade the momentum breakout can try utilizing the 15-day SMA as a trailing stop to maximize earnings. To hedge against a price reversal, place a first stop-loss order below Friday’s low of $82.67.

American Water Works Company, Inc. (AWK)

With a market capitalization of $19.98 billion, American Water Works Company, Inc. (AWK) offers water and wastewater services to over 3.4 million residential, commercial, and industrial clients in the United States and Canada. Over 90% of the money generated by the utilities behemoth comes from regulated markets. While the company’s first-quarter sales above forecasts, coming in at $813 million vs $790.6 million, it posted dismal year-over-year (YoY) profits growth of 3.4%. Despite the mixed results, the firm maintained its full-year 2019 adjusted EPS forecast of $3.54 to $3.64, representing a consistent 8.8% growth rate. American Water pays a 1.68% dividend and has gained 20.33% this year as of May 14, 2019.

American Water shares gained the majority of their year-to-date gain in the first quarter. Since then, the price has moved sideways, ready for another push upward. The first upward breakthrough happened on Friday, and it was followed by a 2.24% increase on above-average volume yesterday, which added buying confidence to the bullish trend. Traders that take a long position might use the measured move strategy to determine a profit objective. Calculate the monetary distance between the low on December 26, 2018, and the high on March 22, and then add that amount to the breakout point ($22 + $107.50 = $129.50 profit objective). Set a stop below the 50-day SMA to cancel transactions if momentum suddenly stops.

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The Southern Company (SO)

The Southern Company (SO) primarily produces, transmits, and distributes energy in the southern United States, serving around 9 million people. Gas Distribution Operations, Gas Pipeline Investments, Wholesale Gas Services, and Gas Marketing Services are its four business sectors. The utilities behemoth reported in-line first-quarter earnings per share of 70 cents, despite a 20% drop in profit from the previous quarter owing to reduced retail sales and the spinoff of its Gulf Power unit. The Southern Company stock has a market capitalization of $56.28 billion and a 4.66% dividend yield. As of May 14, 2019, the company’s shares have increased by 24.54% year to date.

Since bottoming out in late December, the stock price has risen strongly into bull market territory. Despite recent pullbacks failing to hit the 50-day SMA, the RSI remains below the 70.0 level, allowing the price to continue rising before becoming overbought. Those who take advantage of the stock’s recent gain might consider employing an exit strategy that includes a stop below the previous day’s low or below a fast period moving average. Place an initial stop order under the May 9 low of $52.18 to protect trading money.

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