People say that, “Everybody loves a winner.” If that is true, then investors must have really been loving their utility company shares in 2014.
Total return on the normally stodgy group had been beating the major indices even before Christmas week. In the three and a half-day holiday-shortened week they added an amazing 3.56%, more than four times the period’s gain in the S&P 500.
The industry group is now more than two standard deviations above normal. Statisticians will tell you the odds of a pullback are more than 90%. The, very predictable, 10% - 25% potential loss in value could wipe out years of dividend payments.
Don’t let the desire for "income" subject your holdings to capital losses. That becomes the worst of all worlds. You will owe taxes on dividends received while only being able to write off losses if you sell. Even die hard buy-and-hold types should be cashing in utility stocks now, while they remain red hot.
This may be your chance for quite a while to "socket" to them.
Nobody rings a bell at the top, but I’m at least hearing chimes when I see present-day valuations on this slow growth industry.
Brave souls might wish to short naked calls or buy puts on the most overpriced issues.
Disclosure: No positions in utility shares
