Despite a rocky opening to April, the stock market has been kind to many investors so far in 2012. But some sectors have completely missed out on the market rally. That leads to an obvious question: Are these left-behind stocks now bargains, or will they continue to lag the gains in the overall market?
Yesterday, I looked at some of the best-performing sectors for clues on what stocks were best poised to keep up their momentum. Today, let's change focus to look for promising stocks that might be lost amid the rubble of beaten-down sectors.
Where the losers are
In a strong market, the only sector to post actual losses in the first quarter was utilities. But telecom stocks rose by only a fraction of a percent, so both of those areas look like promising places to seek out potential value plays.
As we saw with the best performers yesterday, these two groups don't have a lot in common. A broader examination of both sectors reveals some interesting findings.
Gaining utility
For utilities, the first quarter was an abrupt reversal from a strong 2011. Utility stocks led all other sectors in 2011 with returns of nearly 20%. A hunger for dividend yields was at least partially responsible for the gains, but fundamental factors also played a role.
In particular, changing conditions in the markets for the fuel that utilities use to generate electricity have had a big impact on the sector. Exelon (NYSE: EXC), for instance, has lagged behind many of its peers as its emphasis on nuclear power has been less of a competitive advantage than in previous years.
But looking forward, one major concern is the potential impact that carbon-emissions regulation could have on utilities. An EPA proposal suggested a limit of 1,000 pounds of carbon dioxide per megawatt-hour as a cap on emissions. Although the regulations wouldn't apply to existing plants, utilities could find themselves needing to rely on natural gas-powered plants in the future. And while prices of natural gas are attractively low -- low enough to bring calls of the death of the coal industry -- the increased demand from using more gas for power generation could change that in a hurry. Already, Duke Energy (NYSE: DUK) expects to build two gas-burning power plants and one that runs on converted coal.
Utilities will do best if the economy continues to rebound. Although Duke and many of its peers trade at fairly high earnings multiples, Exelon is more attractively priced and worth a closer look.
Making a connection
For telecom stocks, on the other hand, the story is different. Telecoms performed pretty badly in 2011, with different reasons throughout the industry. For giants AT&T (NYSE: T) and Verizon, modest gains combined with attractive dividends reflected demand for smartphones and other mobile devices.
Where the losses came in, though, was in smaller players. Amid rural telecoms, for instance, Frontier Communications (Nasdaq: FTR) got crushed, as reductions in cash flow prompted yet another dividend cut and sliced roughly 50% off the stock price to boot. Windstream's (Nasdaq: WIN) losses weren't nearly as severe, but it too faced headwinds as eroding business starts to flow through to bottom lines. This shouldn't be surprising, as it's the reason why AT&T and Verizon sold off landline assets in the first place.
A rebound among landline companies is far from assured, although high dividend yields are tempting. The better growth prospects are from mobile carriers, which are already capitalizing on demand for wireless data services. That may make AT&T and Verizon the smarter plays in the space, despite some of the challenges that they face.
Looking for buried treasure
Beaten-down stocks can hide treasure troves of value, but you have to sift through a lot of rubble to find them. Both utilities and telecoms have some promising stocks, but you can't just pick a company at random and expect it to bounce back.
To learn more about these sectors and the issues facing them, check out the Fool's latest information. For mobile stocks, our special report "The Next Trillion-Dollar Revolution" highlights one company that's cashing in on the huge trend, while Motley Fool Income Investor lead analyst James Early looks at the mass of consolidation in the utility industry in this video on utility mergers. Take a look at either or both and get the insight you need to decide whether these stocks are poised to bounce back.
