Utilities Fall on Economic Uncertainty

Utility stocks dropped modestly on Thursday, as the broad market wavered, reflecting continued uncertainty about the U.S. economy.

The Utility Sector Index fell a fraction of a percent on the Philadelphia Stock Exchange, with most stocks posting small declines. The sector has alternated between gains and losses over the past few months, with the index dropping almost 9 percent since reaching a 52-week high of 592.84 in December.

The broad market was unsettled by declining retail sales and a dreary outlook from Cisco Systems, though the Dow Jones Industrial Average rose more than a hundred points by late afternoon.

Investors typically flock to utility stocks during periods of economic malaise because they are considered "safe" investments. Though they provide limited returns, people will still need energy and light even in bad times. With the housing and credit markets significantly weakened and consumer spending on the decline amid high food and energy prices, many have predicted gains for regulated utility stocks.

JPMorgan analyst Andrew Smith maintained a positive view of the sector in a note Thursday, preferring unregulated companies over the longer-term and defensive investments in regulated companies over the shorter term. However, he noted that the utility sector has traded as "a homogenous group" recently, despite the dips and curves.

"We would have expected defensive utilities to outperform hybrid utilities in periods of economic weakness," Smith wrote. "However, we believe the similar performance of the two groups has been driven by investors' uncertainty about the economy."

Regulated utilities provide stable returns, but have less ability to make strategic maneuvers or raise prices without long regulatory battles. Hybrid companies _ that have both regulated and unregulated activities _ or unregulated ones are riskier investments, but have greater short-term growth potential.

Smith recommended several defensive stocks, including Southern Co., which fell 28 cents to $35.98 in afternoon trading; Consolidated Edison Inc., which fell 46 cents to $43.47; Progress Energy Inc., which fell 39 cents to $44.50; Xcel Energy Inc., which fell 9 cents to $20.51; PG&E Corp., which dropped 64 cents to $39.92; and American Electric Power Co., which fell 21 cents to $43.44.

He also said downturns in the following hybrid stocks present buying opportunities: Dynegy Inc., which fell 4 cents to $7.31; NRG Energy Inc., which fell 70 cents to $39.39; Entergy Corp., which rose a quarter to $104.82; and Edison International, which fell 54 cents to $51.54.