03-04-2021, 10:11 PM
(03-04-2021, 09:23 PM)vbin Wrote: I have a question for you Fenders and Eric, please help me validate my understanding here. why long end of curve increasing interest rates are bad for UTEs stocks? Is it just becouse they are debt intensive business and have to borrow a lot? But that doesn't make sense becouse most of them have already borrowed. It's not a variable rate that they borrowed. Is it becouse market is forward looking and if these companies have to refinance(impending debt etc) that will be more expensive, if the yeilds stay high? But that would be true for any company with high debt not just UTEs.It's never made complete sense to me and the market knee jerk reacts to it every time, at least initially. Let me help you not understand it some more.
-Yes they are very capital intensive and they borrow the money. If rates are higher it's an expense and it will be passed on in the next rate hike. Regulated utilities are allowed to be profitable and the level varies by state.
-IMO the bigger issue lies in the fact they are traditionally income investments. Recently some of them had dividend yields under 2 1/2%. That's a big deal if the spread between the completely safe 10 yr gets too close. If you bought the stock five years ago and the stock is up 40% (causing the yield drop), that's not such a big deal as you know your yield on cost is still very solid. But what about the new buyer of your shares? IMO a good utility stock is very similar to a decent DGI stock. Better than many in fact. All my utilities have outperformed KO and others for years.
-Back when interest rates were much higher, utilities commanded much lower PEs. I assumed higher interest rates was much of the reason.
-To your other point, many capital intensive company will in fact suffer if long rates rise for a prolonged period. It hurts their margins and cashflow unless they can raise prices. (inflation which might bring more interest hikes). Momentum stocks usually get crushed, and many have already. The Russell 2000 should be getting beaten up vs the large cap indexes. That hasn't really happened. My Russell ETF has outperformed all my other index funds for some time now. Small Caps did have low valuations relative to the SPY and QQQ though, for several years at least. Give the talking heads a few weeks and they'll think up a reason for whatever irrational thing the market happens to be doing. Listening to them yap is exhausting sometimes. Kinda like me telling you oil will be about $50 right now if you're lucky. I wonder if they are hiring?