As I told you last Friday, Technology stocks have been a great source of stock price appreciation since the market bottomed on March 23.
I’m sure we all have a collection of investments in the technology sector throughout our portfolios, and I’m sure you’re quite happy with your returns.
As I told you last Friday, The Information Technology Index returning a whopping 39.7% over the trailing year. And that includes the drop in September of 12.1%. One of the challenges is the fundamental valuation of the average underlying companies in the tech sector.
S&P Information Technology Index Price to Earnings, Price to Book & Price to Sales — Source Bloomberg Finance, L.P.
Many in the stock market continue to be laser-focused on technology stocks. The idea is that placing bets on tech makes for better returns, even if fundamentals are ignored along the way. Sure, many technology companies continue to bolster revenue and the underlying asset values of their companies.
But tech investments are just one part of successful portfolios. In my Profitable Investing portfolios, I’ve recommended many investments in tech.
But I work to provide balance in sectors and individual companies that provide off-setting gains during challenging times while also providing lots of income along the way.
Well, on Friday last week, I told you there were two sectors to consider if you’re looking to outperform tech stocks, and right now, the market is discounting them.
I told you all about real estate investment trusts (REITs) on Friday. Today, I’m here to talk about utilities.
REITs have tangible real and hard assets that are difficult or impossible to replicate specifically. Land is land, and they aren’t making any more of it.
Well, utilities are in the same boat. Major power plants and transmission equipment can’t just be replicated in local and regional markets.
Not one bit or bite of Silicon Valley wizardry will move, light up or generate a patent royalty without the essential services companies, principally power utilities. And it’s the essential services that are there during economic boom or bust times, keeping the lights on, the gas flowing and the water delivered and taken away.
All of these companies are very asset-intensive. So it is interesting to look at the underlying intrinsic (book) value of all of those assets, as measured and tracked by S&P and its Utilities Index. The weighted average intrinsic value of the stocks in that index, including all of the must-have assets, are up significantly over the past five years. And over the trailing year, they’ve gained around 4%.
Yet, the utilities market’s price to intrinsic value is only 2.02 times, a fraction of the S&P’s general market index and more so for the technology sector stock average. Over the past year, that value is down by around 13%, making for a very good value buy right now.
I detailed one leader in the utilities market, NextEra (NYSE:NEE) at the end of September, but overall, the proof of value now and for longer-term gains and income is shown in the Vanguard Utilities ETF (NYSEARCA:VPU).
Since coming to the market, it has returned around 340%, which equates to an annual equivalent of over 9%. That’s not only good and reliable, but it bests the S&P 500 Index by an ample sum for the same period.
And with its yield of around 2.8%, which has continued to increase in distribution annually over the past five years by an average of over 4%, it makes for a reliable source of portfolio income that also bests inflation.
The bottom line is that a portfolio is just that; a collection of investments meant to provide growth over time and income along the way during all sorts of economic and market conditions.
As I said, I do recommend investments in the tech sector, but I don’t think that’s the only sector you should invest in. Utilities are bargains right now, and the returns speak for themselves. If the rest of the market is discounting them, that means you have an opportunity to get in while prices are low.
On the date of publication, Neil George did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine…one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.