Utility stocks were supposed to be a safe haven; at least, that’s what many beginner investors may believe. After the past few weeks’ worth of excess selling, the seemingly “safe” utility plays have been in the blast zone.
Undoubtedly, just because utility stocks are known to be less correlated to the broader stock market does not mean they can’t feel rumbles within the industry, especially in today’s bizarre, rising-rate environment.
Indeed, it seems like rates can only rise to the moon. And that’s bad news for capital-intensive firms like the utilities. Despite the pressures facing the industry right now, I still think there’s a ton of value to be had, given the risk of recession going into next year.
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Utility sell-off: Time to back up the truck?
Arguably, the recent utility stock sell-off seems like a golden buying opportunity. But only if you’re a long-term thinker who’s willing to stick your neck out as negative momentum continues to pick up.
So, should Canadian investors fasten their seatbelt, hold their noses, and buy one of the utility stocks on the recent dip? Or is it a better idea to wait for the dust to settle before jumping in?
Personally, I think dollar-cost averaging (DCA) into a full position is a smart way to combat turbulence. Without further ado, let’s look at two of the most intriguing utility stocks from a valuation perspective.
The first stock is a rock-solid steady dividend titan that’s more of a sleep-easy play, while the second is a spicier one for deep-value hunters seeking to play a bounce going into 2024. As always, higher risk entails a shot at higher reward. So, do put in the homework before committing to making a purchase in the face of economic headwinds.
Hydro One
Hydro One (TSX: H) stock is recovering after its 18% drop. That’s excessive for such a steady utility, and high-rate fears bear part (if not most) of the blame. For October, shares have been surging higher again. And though new highs may still be far off (H stock down 11% from its peak), I still view the 20.9 times trailing price-to-earnings (P/E) multiple as incredibly modest.
The company has a wide moat protecting its share of profitability in Ontario. And few, if any, firms will be able to break that moat. At the same time, Hydro One is a highly regulated industry, which can make it tough to grow over time.
Either way, H stock is a great bond proxy for jittery investors looking to do relatively well in harsh markets.
My takeaway? Shares look pretty enticing at less than $36 per share.
Algonquin Power & Utilities
Algonquin Power & Utilities (TSX: AQN) is a riskier utility play that’s fallen all the way back to the single digits in recent years. And it’s not just due to industry-facing headwinds.
The company is experiencing a facelift as it exits the renewable energy business. Undoubtedly, Algonquin stock is likely a name that passive income investors scratched off their buy list after last year’s horrible crash.
Still, at $7 and change, I think investors are getting a great risk/reward. Of course, the dividend could find itself at risk again should shares sink lower and the yield climb higher (perhaps 8% could be tested).
