Sector Snap: Utility Stocks Drop

Utility stocks slipped Wednesday as investors became more confident in riskier stocks following signals of another interest-rate cut by the Federal Reserve.

Bear Stearns analyst Jonathan Golub downgraded the sector to "Underweight" from "Market Weight" before the market open, saying rate cuts and other economic stimulus plans will limit the sector.

Both the Dow Jones Utility Average and the Utility Sector Index, traded on the Philadelphia Stock Exchange, dropped about 0.7 percent. Broader indexes regained some ground after Fed Chairman Ben Bernanke said the central bank will remain open to interest-rate cuts to help the economy. Such a move could stimulate the economy by making investors and lenders more willing to spend and lend.

Investors tend to buy up utility stocks during periods of market turmoil because they provide reliable gains and dividends, though growth is more limited by government regulations than other, riskier investments.

Golub characterized the sector as "screaming expensive," even with strong fundamentals, because investors have underestimated regulatory and commodity price risks.

"Risks to the fundamental story are being largely ignored, sentiment has started to shift away from the group, and, at current valuations, the stocks are particularly vulnerable," he wrote.

Edison International shares fell $1.06, or 2 percent, to $51.31 after the company reported flat adjusted fourth-quarter earnings. Its fourth-quarter results beat analyst estimates and its outlook fell within a range of Wall Street predictions.

Sempra Energy's reiteration of a 2008 profit outlook below analyst forecasts helped send its shares down 49 cents to $55.28. The company said a reduced ownership in its commodity-marketing business would hold back results.

Analysts remained positive about both companies, however.

Goldman Sachs analyst Michael Lapides said earnings from Edison's nonregulated business, Edison Mission, were better than he expected and that he considered the company's 2008 outlook was "strong." He reiterated a "Buy" rating on its stock in a note Wednesday.

Citi Investment Research analyst Faisel Khan held his "Buy" rating on Sempra's stock Wednesday as well, saying its share price "remains compelling" and its 10 percent earnings growth target is still "on track."

Florida utility FPL Group Inc. shares bucked the trend, rising 18 cents to $64.50, despite a blackout on Tuesday that cut power to millions across south Florida. A spokeswoman said Wednesday it could take days or weeks before the explanation for the blackout is found.

Elsewhere in the sector, AES Corp. fell 27 cents to $19.16; American Electric Power Co. fell 28 cents to $42.60; Dominion Resources Inc. fell a penny to $42.32; Centerpoint Energy Inc. dropped 5 cents to $15.28; and Exelon Corp. fell 47 cents to $78.99.