Connect with us


These “Safe” Stocks Are Now In Bubble Territory



These "Safe" Stocks Are Now In Bubble Territory

The stocks on Wall Street that are considered a safe bet and a sure thing are often seen as a slightly mundane investments in a portfolio.  

This view might be on the wane, looking at the current activity on the markets.

Over the last six months, investment in stocks that show little dramatic action have been a safe, but dull market strategy. 

As can be seen in the chart below, which clarifies the point just made, the trend towards a slow but definite upward trajectory is evident.


So what is it that is sounding possible alarm bells in the minds of analysts regarding the statements coming through lately? 

In certain sectors, it is being cautioned that the safe investment strategies are no longer the haven of confidence they once were.

With just a quick flick through any investment advisory site or analyst’s recommendations, it is easy to see that utilities have always been seen as a safe stock in which to place a “buy” order. 

These shares are listed in many recommendations as having a twelve month upside potential. 

Those figures alone imbue the commodity with a veneer of desirability.

With utility stocks having high short interest to equity float ratios, they are traded with confidence and have great payoffs. 

That trust is not always so apparent. 

The utility sector has consolidated a positive trend with sheer hard-won momentum.

Words of caution are beginning to filter in as can be seen from the graph below.

The slow and steady climb could be perceived as fragile rather than stable reading the signs.

This news has been rippling through the consciousness of all the markets as it was announced last week that the U.S. now has stockpiled more oil reserves than the Middle East. 

This is an unprecedented occurrence, and it is yet to be seen how the markets will react.


As can be seen, utility stocks rose by 21.2 % in the first half of this year. 

This has been the most decisive climb seen in 25 years. 

This has some analysts predicting that the utility sector is stretched too thin and the value of the stocks overvalued.

[ms_divider style=”normal” align=”left” width=”100%” margin_top=”30″ margin_bottom=”30″ border_size=”5″ border_color=”#f2f2f2″ icon=”” class=”” id=””][/ms_divider]

[ms_featurebox style=”4″ title_font_size=”18″ title_color=”#2b2b2b” icon_circle=”no” icon_size=”46″ title=”Recommended Link” icon=”” alignment=”left” icon_animation_type=”” icon_color=”” icon_background_color=”” icon_border_color=”” icon_border_width=”0″ flip_icon=”none” spinning_icon=”no” icon_image=”” icon_image_width=”0″ icon_image_height=”” link_url=”” link_target=”_blank” link_text=”Click Here To Find Out What It Is…” link_color=”#4885bf” content_color=”” content_box_background_color=”” class=”” id=””]This one stock is quietly earning 100s of percent in the gold bull market. It's already up 294% [/ms_featurebox]

[ms_divider style=”normal” align=”left” width=”100%” margin_top=”30″ margin_bottom=”30″ border_size=”5″ border_color=”#f2f2f2″ icon=”” class=”” id=””][/ms_divider]

With analysts prompting investors to proceed with caution, these conditions could lead to a climate where a bubble panic may be inevitable.

  • This may already be happening as there was a definite decline in the utility sector markets recorded last Thursday. They reached their lowest posting in seven weeks after a drop of 1.8 %.
  • Investments in markets that show both yields and safety are always a popular choice. Volatility makes any investor uneasy.  The search for certainty is a difficult task when confronted with:
  • Markets are showing only low yields in the short to mid-term or those demanding long-term dedication for any yield beyond the rate of inflation.
  • Hidden growth potential.
  • Geopolitical uncertainty

In the environment with the above factors in play, the investors choose to place confidence in:

  • Utilities
  • Treasuries
  • Gold prices
  • REITs (Real estate investment trusts)
  • Telecoms
  • Consumer staples

Limited partnerships are also sometimes sought out.

The valuation metric that is standard and most prevalent in gauging this market is the S & P 500 utilities sector. 

This is currently at 19 on the twelve-month price-to-earnings ratio.

Looking at the chart below, the activity that is continuing on the service market is always fluctuating:


The S & P 500 registering 19 is above the ten year average of 14 and elevated above the PE (price earnings ratio) of other listings on the index. 

This reinforces the fact that utilities perform in trades better than others, with a continual positive trend that is often preferred by investors.

Analysts state that the reason for this is when rates are falling, and there is uncertainty in global investment (as seen in the recent market falls experienced after the Brexit results) investors are inclined towards domestic sectors. 

And one of the main defensive and local segments in the U.S. are utilities.

This is the reason why utility stock prices are up 20%. 

Despite this positive incline, predicted earnings growth for the service sector for the year end 2016 is only a cautious 4.4%. 

This is the figure given by FactSet, which is an acknowledged financial research and investment analytics tool.

Investors have been known to move in quickly on markets that may not show the expected growth in earnings. 

This causes valuations to become unpredictable and soft.

Compared to the technology sector of the markets, which is seen as more volatile but is showing yields only slightly behind those of utilities, the utility industry has a marginally higher PE ratio at 19.85 to techno at 19.16%.

In the past, utilities came back strong twice, in the face of falling interest rates. 

The ricochet off these inflations, that happened in 2011-2012 and again in 2014, was that the prices collapsed, and gains lost when rates regained normalcy.

So it follows to say that any extreme positive upswing in utility prices one year will result in deflated returns the next year. 

This forecast does not include the ramifications of negative and positive occurrences on the global or political stages, however.

The utility markets experienced their biggest price gains in the second quarter of this year in the run-up to the Brexit referendum vote that was held in Britain last month (June 2016) expanding on the above observation.

In the panic that ensued after the shock “leave” results came in, utilities (and gold) were again the preferred stock market choice.

Service markets were up more than 8% in June on the S & P 500, for the week following the Brexit. 

This point emphasizes the importance that geopolitical uncertainty plays in the markets.

The utility market has climbed steadily since the start of 2016, with no outstanding remarkable action recorded. 

Alongside telecommunications, it remains the best performing sector on a year-to-date basis according to S & P 500 indices.

The information that can be read from the charts, relating to the utility industry on all technical levels, show higher runs breaking through. 

The market term used – “break-out” – means that prices have broken out over and above a predicted level that is the standard accepted price on the markets and continues to climb. 

If the rise continues to be positive and is maintained, this is “follow through.”

An example of this can be given when PHLX Utilities Index UTY, +0.96% broke out and followed through was also achieved.

Due to the proven record this year of the utility market showing continued active breakout and follow through, they remain the preferred stock choice. 

The analysts and investors are predicting that the market is not yet overextended and utilities remain a desirable, safe investment.

Defensive stock buying is linked to the recent rise in U.S. government bonds. 

This move is driven by the geopolitical upheaval currently experienced globally which causes the investor the seek out the apparent safety net of the public debt. 

This higher demand has driven U.S. bond prices up, and yields have fallen. 

So utilities are sought out as an alternative.

That pattern of stock market buying may be about to change. 

According to analysts, if Treasuries come under the pressure to sell, this may cause bond prices to fall sharply, and this will lead to yields increasing significantly.

If U.S. inflation shows signs of a potential increase, then wages will be forced to rise. 

This is the environment under which Treasuries could come under selling pressure.

Economist polled by MarketWatch are predicting that the nonfarm payrolls (goods, construction and manufacturing companies in the U.S.) report that was due lsat Friday will show an optimistic 170,000 jobs posted in June 2016. 

This is in tandem with an increase of 0.2% in average hourly earnings.  

What has been showing an affirmative higher trend over the past twelve months, is year-over-year wage increases. 

Up to now, these have so far been slow to recover from the market crisis in 2008.

If Treasuries initiates a sell off because of possible rising wage inflation, this could have an overflow effect on defensive equity buying, such as utilities.

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Copyright © 2023 The Capitalist. his copyrighted material may not be republished without express permission. The information presented here is for general educational purposes only. MATERIAL CONNECTION DISCLOSURE: You should assume that this website has an affiliate relationship and/or another material connection to the persons or businesses mentioned in or linked to from this page and may receive commissions from purchases you make on subsequent web sites. You should not rely solely on information contained in this email to evaluate the product or service being endorsed. Always exercise due diligence before purchasing any product or service. This website contains advertisements.


Is THE newsletter for…


Stay up-to-date with the latest kick-ass interviews, podcasts, and more as we cover a wide range of topics, in the world of finance and technology. Don't miss out on our exclusive content featuring expert opinions and market insights delivered to your inbox 100% FREE!