Will Utility Earnings Spark Opportunities?

05/03/2012 10:40 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

Upcoming earnings reports from the utilities sector could inspire some profit taking that would present favorable entry points for a pair of high-yielding top performers.

Last week, the Select Sector SPDR - Utilities (XLU) had one of its best weeks of the year, gaining almost 1.5%. Despite the recent gain, however, XLU is still down a bit for the year, although it carries a healthy yield of 3.9%. It was the best-performing sector ETF in 2011, gaining 14.8%.

The largest holding in XLU is Southern Co. (SO), which makes up 9%. The company missed on earnings last week, but the stock is still trading near the year’s highs. Duke Energy Co. (DUK) is also among the top five holdings in XLU, and it is one of the many utility companies that will be reporting earnings in the next two days. DUK has a healthy yield of 4.7%, which is a bit higher than that of SO.

Other utility companies also scheduled to report include Ameren Corporation (AEE), Pinnacle West Capital Corporation (PNW), CenterPoint Energy, Inc. (CNP), and Sempra Energy (SRE).

Often times, earnings disappointments can cause brief reactions in utility stocks which create good opportunities to lock in attractive yields. Two utilities stocks in particular look the best technically and should be bought on pullbacks to support.

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Chart Analysis: The Select Sector SPDR - Utilities (XLU) was able to move through its daily downtrend, line a, last week. There is still resistance from late December at $36.27.

  • There is initial support in the $35-$35.30 area with more important support at $34.30-$34.50, line b
  • Early this year, the RS analysis had topped out, suggesting the utilities were likely to underperform in the first quarter
  • Daily relative performance is trying to bottom out but needs to move through resistance at line d to confirm
  • Daily on-balance volume (OBV) did confirm the price action as it moved through resistance at line e
  • A drop back to the weighted moving average (WMA) should present a buying opportunity
  • Seasonal analysis (see chart) shows that the utility stocks typically bottom in mid-March
  • Weekly OBV (not shown) is above its weighted moving average and positive

Duke Energy Corp. (DUK) is a $28.7 billion electric utility company that operates in the US and Latin America. The stock currently yields 4.7%. The close above the downtrend (line f) on April 24 likely completed its continuation pattern.

  • The 127.21% Fibonacci retracement target is at $22.75 while the chart formation has targets in the $23 area
  • The daily RS line is trying to bottom out and has moved back above its weighted moving average. A close above line i would indicate that DUK has started to outperform the S&P 500
  • Volume was very heavy on the price breakout, and the bottom formation in the daily OBV has been completed with the move through resistance at line j
  • There is initial support in the $21 area, line f, with further support at $20.75 (line g)

NEXT: Another Utilities Stock to Buy on a Correction

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Sempra Energy (SRE) is a $15.3 billion global energy services holding company that is part of the gas utility industry group. The company is scheduled to report earnings on Thursday afternoon, and the stock currently yields 3.7%.

  • The weekly chart shows that it staged a breakout above two-year resistance, line a, in the $55 area
  • The multi-year trading range has upside targets in the $75 area
  • RS analysis confirmed the price action when it overcame its downtrend, line b, and moved above the prior high
  • The RS line has shown continued improvement since last summer, line c
  • Weekly OBV also overcame key resistance, line d, but has not been as strong as prices
  • The OBV has strong support at its uptrend, line e
  • Weekly candle chart suggests we could see a lower close this week
  • There is first good support at $61.50-$62 with more important support at $59.40-$60.50

What It Means: While there are no signs yet that the market is going to see a correction like what occurred in 2010 and 2011, the markets are likely to be more difficult to trade throughout the summer months.

The favorable yields of both the large cap and utility stocks means they should play a role in most portfolios. Buying either of these two utilities stocks on 3%-5% corrections would make their yields even more attractive.

How to Profit: For Duke Energy Corp. (DUK), go 50% long at $21.22 and 50% long at $20.98 with a stop at $20.08 (risk of approx. 4.8%).

For Sempra Energy (SRE), go 50% long at $61.44 and 50% long at $59.66 with a stop at $56.48 (risk of approx. 6.7%).

Portfolio Update
For the Select Sector SPDR - Utilities (XLU), buyers should be 50% long at $34.86 and 50% long at $34.52. Use a stop at $33.78.

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