Sectors To Watch: Who Pulled The Plug On Utility Stocks?

| August 29, 2012 | 0 Comments

Dividend paying stocks have been the hottest area of the market lately.

And for good reason…

Economic growth is sputtering and interest rates are next to nothing.  Investors who want to earn a decent return on their investment see high quality dividend paying stocks as their best option.

You see, high quality dividend paying stocks like utilities, consumer staples, telecoms, and health care are right in the sweet spot for many investors.  They’re stable enough to be seen as a safe investment and their dividend yield beats the heck out of anything you can get from Treasuries.

Just a few weeks ago, the Utilities Select Sector SPDR (XLU) was at a 52-week high.  It was up more than 23% from the 52-week low and riding a wave of optimism.

Utilities Select Sector SPDR Chart

Now the sector has given back a good chunk of those gains.  Over the last week, XLU has fallen 3%.  That’s a major selloff for a safe haven sector like utilities.

What’s behind the reversal of fortunes?

At first glance, utilities stocks are stable businesses with guaranteed demand for their product.  But behind the scenes, the last few years have been highly chaotic.

The utilities sector has been awash in a tidal wave of mergers and acquisitions.  The M&A activity has allowed the sector to reduce costs and increase profitability.

In fact, a good portion of the price gains we’ve seen in XLU over the last few years can be attributed to the cost reducing benefits of the M&A activity.

But here’s the thing…  M&A activity is slowing down.

In the first quarter of 2011, there were 32 deals worth $53 billion.  But this year there were only seven deals greater than $50 million in the first quarter.  And they totaled just $4.1 billion.

In short, utility companies are having a hard time gaining government approval for their proposed mergers.  Unfortunately, the new hard line approach is likely here to stay.

Without the catalyst of M&A activity to propel XLU higher, this sector ETF is headed for a rough patch.  Take a look at buying the December $36 Puts for about $1 to profit from further downside in this sector in the second half of the year.

***Editor’s Note***  Our technology analysts, Corey Williams is releasing a ‘flash trade’ in his Tech Boom Trader service tomorrow.  These trades are typically quick, high-potential opportunities that only last a few days.  Click here to join up so you can get his one delivered straight to your inbox!

Good Investing,

Corey Williams

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Category: ETFs, Options Trading

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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