Once Hot Utilities Stocks Losing Popularity

Just like everything else powered by the whims of crowds, types of stocks also have their “five minutes of fame.” Take, for instance, the coolness surrounding Chinese Internet stocks one month, solar energy manufacturers another month, or daily-deal sites like Groupon a third month.

Dust Off Grandma's Stocks

But who would have ever thought the boring, safe, old-fashioned, faithful utility stock would become the darling of 2011? Well maybe you grandmother, but regular investors? Yes they sure were popular last year; in fact, utility sector stocks were the be-all and end-all best-performing stock sector, up 8.7% overall in 2011, says the fund-tracking firm Lipper. We don’t have to tell you this was quite a bit better than the go-nowhere, do-nothing, S&P 500.

Proceed with Caution as Economy Recovers

But before you sell the farm and buy out the electric company, heed the warning that this unlikely hero has likely wilted back into the safe haven of slow growth, where it is usually found. Investors bestowed their beneficence on utility sector stocks because of their reputation for being safe and sound, but now their price to earnings ratio has gone a bit high; up to 14, well above the S&P’s average of 12.2, a warning to proceed with caution.

"Utilities stocks were red-hot, but the public needs to know the tide has turned against them," says Alec Young, global equity strategist for S&P Capital IQ. "It's an untold story, and there hasn't been enough coverage of it."

What makes Young say this? During recessions, such as the one we are hopefully emerging from, investors flee to utility stocks for their lovely mix of stability and yield. But as the economy recovers with decent GDP growth and jobless rates lowering, history has shown that counter-cyclical stocks like utilities tend to fall behind.

"The macro picture is improving, and we're past the point of maximum fear," says Young. "Now there will be less focus on yield and capital preservation, and more willingness to speculate. All of that is bad news for utilities."

About Alison Meadows

Alison Meadows has a PHD in Economic Trends in Modern Times and is a known writer who focuses on hedge fund investments. Meadows, her husband, and three kids live in Boston, where she grew up and attended college. Contact Alison at alison[at]businessdistrict.com