Utilities & Power

Utilities gained 14% in 2021 but still lagged the broader market by 13%. This was the sector’s third consecutive laggard year and we have to go back to the 1990s to find a longer stretch of annual utility underperformance. On its face, the macro set up for the group may look challenging with the Fed expected to begin raising rates as soon as March. While owning utility stocks into a Fed tightening cycle sounds counter-intuitive, looking back at prior cycles we find no hard and fast pattern. Rather than focusing on rates, in our view the economic and macro context are the more important factors likely to drive utility relative performance from here. We tend to view a flattening curve and other signs of economic deceleration as conducive to utility outperformance and relative value does not present a significant hurdle with the sector trading at only a modest premium to the broader market. Early going in 2022 has been volatile but encouraging overall, with utilities building on a strong December despite headwinds from index heavyweight NEE, which has been pressured by growth stock de-rating and a surprise leadership transition. Reflecting a nuanced backdrop, we continue to emphasize value within our utility positioning although there is a shorter list of value names to choose from given strategic moves raising the quality of the “average” utility over the past year. Our Top Pick for 2022 is PCG, which we continue to see as both a compelling value opportunity and self-help story.

Top Picks:

  • PG&E Corp. (PCG)

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Jonathan Arnold

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