Monday, September 10, 2012

Utility Stocks Well-Positioned for the Short Term and Beyond; But Also Bullish on Cheap Inflation Hedge Plays in the Stock Market

A few months ago, I was (half-)joking that utility stocks were turning into the new mo-mo stocks.  Well, the NAZ stocks as usual have turned into what they so often are, and have out-performed the XLU and such stalwarts as Con Ed by a massive amount lately.  This tends to reverse.  Importantly, Treasury yields are stubbornly holding at very low levels.  The Treasury bond buyer is giving up quite a lot of yield versus utility stocks that both yield more and also, ultimately, provide a degree of inflation protection. 

Last year my Treasury holdings peaked at about 30% portfolio weighting, mostly in very long-term zero coupon bonds.  This has now gone to zero (as disclosed about 203 months ago), and I have been adding a bit more utilities to get to about a 15% weighting. 

There are also, though, a growing number of undervalued inflation hedges in the portfolio, as I think the ultra-ultra-low interest rate scenario in the U.S. is looking a bit bizarre.  But I think the simpler play is for a convergence of interest rates between Treasurys and high quality muni bonds and utilities, with the former yields moseying on up over time and the latter moving on down-- potentially explosively as occurred last summer with Treasury yields.  If you blinked, you missed the move.

Over time, I am increasingly bullish on inflation/value stocks such as HP and AGU.  AGU is of interest in that it is challenging a multi-year triple top with the catalyst of a New York-based hedge fund (Jana Partners) looking to force a restructuring.  At 10X earnings with strong finances and a global reach, this one looks very interesting.


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