Investors Seek Refuge in Utilities as Trade War Escalates

Profitability of utilities insulated from tariffs

Just as investors were getting somewhat complacent about a resolution to the year-long trade war between the United States and China, a host of new tariffs imposed by both countries has dashed hopes of an agreement being reached any time soon.

Washington struck first on Friday, hiking tariffs from 10% to 25% on $200 billion worth of Chinese goods. Beijing retaliated Monday with plans to increase levies on $60 billion in U.S. imports. President Trump countered that move by starting the process to impose tariffs on Chinese goods worth an additional $300 billion – meaning that virtually all Chinese goods imported into the U.S. would attract tariffs.

The return to a full-blown tit-for-tat tariff war between the world's two economic superpowers has sent stocks into a nosedive over the past week, with sectors that have the most exposure to China, such as industrials and technology, the hardest hit. The utilities sector, on the other hand, has seen significant buying interest as investors take refuge in stocks that generate the lion's share of their revenue domestically.

"Tariffs won't impact utility sales, nor will they directly affect profitability. And even if duties lead to higher steel prices or costs of other materials, utilities are apt to recover those expenses from customers," said John Bartlett, co-portfolio manager of the Reaves Utility Income Fund, per Bloomberg.

Those who seek a safe-haven equities play amid the escalating trade war should run their eye over these trading ideas that zone in on three stable utilities companies.

American Electric Power Company, Inc. (AEP)

Founded in 1906, the American Electric Power Company, Inc. (AEP) distributes electricity for sale to retail and wholesale customers in the United States. It generates electricity using coal, natural gas, renewable sources and nuclear. The Columbus, Ohio-based company reported first quarter earnings per share (EPS) of $1.19, easily topping analysts' expectations of $1.10. Its bottom line rose 24% compared to the same quarter last year. American Electric reaffirmed its 2019 operating earnings guidance of between $4.00 and $4.20 per share and expects investments in regulated businesses to support continued earnings growth. Trading at $86.34 with a market capitalization of $42.60 billion and offering a 3.13% dividend yield, the stock is up 17.31% year to date (YTD) as of May 14, 2019.

After spending recent months in a tight three-point trading range, American Electric's share price rallied strongly from the 50-day simple moving average (SMA) in Friday's trading session and continued its push higher Monday to print a new all-time high. The relative strength index (RSI) remains below overbought territory, giving the stock ample room to move higher before consolidating. Those who play the momentum breakout should consider using the 15-day SMA as a trailing stop to let profits run as far as possible. Set an initial stop-loss order under Friday's low at $82.67 to protect against a sudden reversal in price.

Chart depicting the share price of American Electric Power Company, Inc. (AEP)

American Water Works Company, Inc. (AWK)

American Water Works Company, Inc. (AWK), with a market cap of $19.98 billion, provides water and wastewater services to roughly 3.4 million residential, commercial and industrial customers in the United States and Canada. The utilities giant generates over 90% of its revenue from regulated markets. While the company topped first quarter revenue projections – coming in at $813 million versus expectations of $790.6 million – it reported weak year-over-year (YoY) earnings growth of 3.4%. Amid the mixed results, the company reiterated its full-year 2019 adjusted EPS outlook of $3.54 to $3.64, which represents a steady 8.8% growth rate. As of May 14, 2019, American Water issues a 1.68% dividend and has gained 20.33% so far this year.

American Water shares added the bulk of their YTD gain in the first quarter. Since that time, the price has tracked sideways, preparing for its next push higher. The initial upside breakout occurred Friday and was followed by 2.24% jump on above-average volume yesterday that added buyer conviction to the bullish move. Traders who take a long position could set a profit target using the measured move technique. For example, calculate the distance in dollars between the low from Dec. 26, 2018, and the high from March 22; then add that amount to the breakout point ($22 + $107.50 = $129.50 profit target). Position a stop under the 50-day SMA to close trades if momentum unexpectedly stalls.

Chart depicting the share price of American Water Works Company, Inc. (AWK)

The Southern Company (SO)

The Southern Company (SO) generates, transmits and distributes electricity predominantly in the southeastern United States, servicing roughly 9 million customers. It operates through four business segments: Gas Distribution Operations, Gas Pipeline Investments, Wholesale Gas Services and Gas Marketing Services. The utilities giant posted in-line first quarter EPS of 70 cents, although the result was down 20% from the year-ago quarter's profit due to lower sales from the retail segment and the divestment of its Gulf Power subsidiary. The Southern Company stock has a $56.28 billion market cap and pays investors an enticing 4.66% dividend yield. Performance wise, the company's shares have jumped 24.54% YTD as of May 14, 2019.

The share price has trended sharply higher into bull market territory since bottoming in late December. Despite recent pullbacks failing to reach the 50-day SMA, the RSI sits below the 70.0 threshold that allows upside momentum to continue before the price becomes overbought. Those who buy the stock's recent strength should think about using an exit strategy that trails a stop beneath the previous day's low or under a fast period moving average. Protect trading capital by placing an initial stop order beneath the May 9 low at $52.18.

Chart depicting the share price of The Southern Company (SO)
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