Screening for Utility Stocks

I am currently executing a portfolio with various strategies. I would like a defensive component specifically that which covers utility or a majority of utility stocks as a component. It appears to me that utility stocks with low volatility appear to perform with the least drawdowns and steady appreciation. I understand Value, Quality, and Growth interplay for stocks in general but I would like to better understand what income statement line items are more critical for discerning these characteristics of utility stocks. I also understand there is a large dividend component (with ability to maintain dividends) to why investors select utility stocks and would like to further understand how this interplays with other income statement items specific to utility stocks. Any links to good articles or actionable strategies would be greatly appreciated.

Thanks!
Jeff

Hi Jeff, Here’s what I learned. Huge caveat that OOS over the past 1-1.3 yr or so I can’t tell if what I’ve got is any better or worse than XLU - but it backtests well enough that I’m giving it a chance. I do use it in my port, with utilities as a defensive component.

Old school value stuff seemed to work better for me for utilities. Like Graham and Buffett approaches. If I recall the p123 All-Stars Buffett model does pretty well on utilities and I used that as a part of the model. I actually used Graham Number type calcs combining consideration for both eps and bookvalue - the only model where I’ve done so.

On top of that, like you mention, were layed on some traditional doses of factors like fundamental growth (including stability/consistency of growth), quality factors based around total capital due to big debt loads most of utilities have (Piot-Fscore was useful for me also), some efficiency numbers around capex and opcf ratios, along with the basic lowvol, shortinterest; and from a liquidity standpoint it does seem smaller utilities might have an advantage - although watch out for oddballs at the very low end that might be classified as a utility but not fit traditional idea of a utility.

I included a mild mean reverting factor that seemed to work well with the utilities the model selected and tends to fit well with my investing personality (and when the market feels toppy for many stocks, the utilities might not be participating as well, so it can give appealing options for that environment for swing trades imho). The model was put together a while back, but I think it (edit: it being “mean reversion”) added a couple pp annually vs. the model without.

I just looked through the ranking system and see I did not use anything related to dividends or payout ratio, so I’m guessing I didn’t find much help there, but can’t recall for sure.

For reference: Top 10 rated utes in the system now are: UTL, NWE, CWCO, FTS, ARTNA, AVA, MDU, OTTR, CPK, SWX

I agree with you that developing a Utility stock model is a good way to reduce the volatility and drawdowns. I’ve recently been working on adding a Utility stock model to my live book. The variable testing I’ve done so far has shown that the following variables are useful:
Sales percent change in the prior quarter
Sales percent change in the prior year quarter
Sales 3 year combined growth rate
Asset turnover in the last quarter
Asset turnover in the TTM
EPS percent change in the prior quarter
Price to sales in the TTM

I have used the above variables to develop a screen using the last three years of data for all utility stocks greater than 300 million market cap(there are very few small utility stocks). I don’t think there are enough utility stocks to develop a ranking system so I prefer screening.

Hopefully, this helps to get you started.

Erik

I struggled with what Erik mentions here which makes building a ranking system difficult. There just aren’t that many public utilities, and my base universe only has 73 stocks in it right now. So even picking just 10 stocks means selecting 13.6% of the available universe. Analysis ends up being very coarse as a result.

Agree, Buffett ranking system does well.


All,

Good discussion. Could not agree more.

I also add Consumer Staples and Health care. Comparison of the the sector SPDRs in a book below.

XLU alone has a marginally better annualized return (First Image).

While the combination (XLU, XLP and XLV) has less of a drawdown and a better Shape Ratio. (Second Image)

-Jim



Thanks for all the responses. They’ve all been very helpful. It appears that the small cap space has historically provided greater opportunities for utility total return. I find it interesting how Buffet and Graham rankings seem to do the best. I suppose that makes sense considering that around the time of Graham utilities and transportation companies comprised a good portion of the stock market. Buffet has historically invested in very traditionally structured companies. I’d surmise that is also why these rankings probably don’t appear to work as well for identifying value opportunities across the broader market.

Jeff