The first day of the third quarter got off to an exemplary start on Wall Street, as nine out of 10 sectors added ground in the stock market today. Stronger-than-expected auto sales and impressive manufacturing activity in June combined to send stocks higher on the first day of July. The same can't be said for shares of Chesapeake Energy (CHKA.Q), Exelon Corporation (EXC -0.29%), and FirstEnergy Corp. (FE -0.24%), which ended as the three worst performers in the S&P 500 Index (^GSPC 1.20%) on Tuesday. The S&P, for its part, finished at record closing highs, adding 13 points, or 0.7%, to end at 1,973.
Chesapeake Energy was the index's biggest laggard, losing 5.9% by the ring of the closing bell. This, however, was a more of a technicality than an indictment against the company. Chesapeake, which produces natural gas, oil, and natural gas liquids, completed the spinoff of its oilfield services business today; that move gave Chesapeake shareholders one share of the newly independent Seventy Seven Energy for each 14 Chesapeake Energy shares held by investors. That is to say, anyone who isn't a brand-spankin' new Chesapeake investor now also owns a piece of a newly independent shale fracking company. Seventy Seven Energy stock advanced more than 6% on Wall Street today.
Shares of the diversified utilities company Exelon didn't have a spinoff to blame for its 2.1% losses today. Market mechanics had more to do with Exelon's unpopularity today; the utilities sector often lags when the stock market is in rally mode, for several reasons. Firstly, utilities are one of the most heavily regulated areas of the investible market, making them great sources of stability and income for more conservative-minded investors or portfolios seeking safer diversification strategies.
A FirstEnergy crew repairs a power line. Image source: FirstEnergy.
Another reason utility stocks get beat up on go-go days like today also relates to the "risk-on/risk-off" tendencies of investors. On more bullish days ("risk on") like Tuesday, big-money, market-chasing fund managers tend to pull money out of fixed income investment like bonds and treasuries and gain exposure in the more exciting world of stocks. Stocks like Exelon and FirstEnergy -- which also lost 2.1% today – don't merely fall into the income-producing, and therefore "boring" category with their high dividend yields. They also typically borrow large amounts of money to finance their impressive dividends, and just as funds are selling utilities stocks to seek higher returns elsewhere, borrowing costs essentially rise as the bond market loses its appeal simultaneously, making those high dividends even more costly to finance. FirstEnergy, for instance, pays an annual dividend equal to nearly 140% of its yearly earnings, using borrowed funds to pay shareholders the excess cash.
