As per our methodology, we are starting off with the Relative Rotation Graph (RRG) in search for sectors that are rotating in a manner that installs confidence in any short term positions.
This weeks sector deep dive will focus on the utilities sector (IXU). We can see how the sector is gaining in strength with positive rotation against the market, therefore we will believe this a good place to start in search for outperformance.
RRG (relative rotation graph), Weekly
Utilities sector ETF (weekly candlestick chart, MACD)
The sector ETF has dipped below crucial support on the daily timeframe however the break was not sustained on the weekly timeframe leading us to believe that support will hold around $34.80. This would create a long opportunity on the ETF assuming we hold support. Alternatively we are going to take a look at some stock ideas within the sector also.
Exelon Corporation (EXC)
Technically
After a breakout of the bearish trendline, weekly MACD remain bullish supporting the wider term trend. We have the possibility of a slight pullback towards trend line support around $41, however if this market is going to continue we should hold above weekly support of $39. Further confirmation would the break of near term resistance at $44 resulting in a minimum upside target of $51 (+15%) however if we break through the high then $65 is in our sights.
Fundamentally
PEG (price to earnings growth) 1.30 which is one of the lowest in the sector suggesting undervaluation
Price - Operating Cash Flow Ratio (8.42x), relatively low for the sector pointing towards another sign of undervaluation.
DBA SEMPRA (SRE)
Technically
SRE has been in a steady uptrend for the past 24 months gradually easing its way higher. With potential momentum in the utilities sector, we believe technically this has grounds to push back towards the weekly highs 20% higher than current market price, assuming the floor holds around $135 - $137.
Fundamentally
PEG ratio 5.71, not suggesting under valuation
P/ OCF , 22.03x (fairly priced)
Given the fundamental ratios we consider as per our methodology, our idea on SRE is on a technical basis taking advantage of improved momentum within the sector.
Much of the sector stocks that are trading with sufficient volume have been range bound for the past 24 months, what's more we are mid range, creating poor risk reward ratios and a poor utilising use of capital.
Eversource Energy (ES)
Technically
A company that remains on our watchlist, after a steadily rise in share price, ES holds long term momentum however over the past 24 months has remained largely range bound like many utilities stocks. We are edging lower breaking out of this range and will be watching for sharp dips into the supply zone (green)
Fundamentally
PEG 2.2 (relatively undervalued)
P / OCF 10.2x (historically low for this company)
Strategy
Consider long exposure to the ideas above including SRE, EXC and the SPDR utilities ETF as they provide the highest probability setups for the medium term.
Monitor stocks; DUK / ES for dips into support (10-15% from current levels) as they will provide great opportunities for discount longs however the technical suggest a better risk reward entry will present itself.
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