ChristopherCarrollSmith

Is it time for a utilities play?

Long
RYU/RSP  
RYU/RSP  
Defensives have been outperforming the S&P 500 since March. If you believe the outperformance will continue, then now might be the time to buy, as they are approaching the support line.


I'm particularly watching utilities. In addition to being a classic defensive sector, utilities also have "growth" potential. They had a period of strong outperformance a couple years ago during the renewables boom. Presently they look cheap compared to other sectors. The equal-weight utilities to equal-weight S&P 500 ratio has made a large bullish divergence and is currently testing a support level . Might it make a double bottom here?


I particularly like NRG Energy, a Texas utility with a diversified basket of power generation capabilities, including fossil fuels and renewables. NRG is looking like it will make a breakout attempt soon:


It has a forward P/E of 6, a forward P/S under .5, and a P/ FCF under 11. Dividend yield is over 4%. Open interest is bullish , and upside to the average analyst price target is 36%. This bad boy could seriously rip if utilities return to strength.

Utilities move somewhat in sympathy with oil prices, and oil prices are breaking out. That could prove to be a catalyst for this sector.
Comment: Oh look, NRG just broke out:

Comment: Looks to be moving with conviction despite broader market weakness.

Comment: XLU made a perfect trend line touch today and so far is holding just above the 200-day EMA. Calls at the $64 strike are pretty cheap.


Also note that the RYU/RSP ratio rallied, then sharply pulled back, and now is very close to another support level. And looking like it could rally again.

Comment: Quick update on NRG. It has been holding above the 20-day EMA. There have been several analyst price target hikes in recent days. If we can get a little pullback to touch the 20-day EMA, I think that could trigger another move up.

Comment: Goldman said in a note today that NRG is 50% undervalued. This caused the stock to spike in a big way. I still have a good number of shares, but I sold the last of my calls and locked in a chunky profit.
Comment: RYU/RSP ratio is working on getting across the trend line.


Disclaimer

The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.