Utility stocks wavered Monday as investors sought to determine whether the sector is poised for a rally because of market risk or a slump because economic fears have been overstated.
The Dow Jones Utility Index and another Utility Sector Index traded on the Philadelphia Stock Exchange were alternating between gains and losses, with few components moving more than a percent.
Citi Investment Research analyst Greg Gordon said certain stocks, including San Francisco-based upgraded PG&E Corp., have been underappreciated by the market recently. He said utility stocks are faring worse than other defensive investments such as the bond market, after factoring in earnings and dividend growth.
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. The broad market dropped sharply last week because of fears that the U.S. economy is headed for a recession.
There is a "compelling buying opportunity for certain names, despite general market commentary ... that now is a good time to be rotating out of utilities," Gordon said in a note Sunday.
PG&E's shares have dropped nearly 13 percent this year. They were down 5 cents at $37.61 in morning trading Monday. PG&E has an "even more unwarranted discount" than the overall utility sector, given its fundamentals, Gordon said.
Jefferies & Co. analyst Debra Bromberg upgraded Entergy Corp. and Exelon Corp. to "Buy" from "Hold" on Monday as well, citing share price declines. She expects Entergy's power plants to increase in value as supplies tighten in the Northeast and Exelon to benefit from commodity prices, capacity prices and more profitable nuclear plants.
Entergy shares rose $1.17 to $103.91 as Exelon gained 76 cents to $75.61.
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