Interest rates are likely to stay at their current level through the summer. That’s based on the latest economic data, showing inflation remains stubbornly high. That means investors looking for the best returns may not find it in growth stocks in the next few months.
Until interest rates start to move lower, investors will likely see relatively better returns in more defensive stocks. These stocks tend to offer lower volatility, and tend to pay above-average levels of income.
Amid defensive stocks, utility companies may offer bond-like returns with higher prospective returns.
They should rally as interest rates move lower. Plus, utilities may be able to improve their operations with AI software in the years ahead.
Overall, that means that utility’s relative underperformance to the rest of the market recently makes them a contrarian buy now.
In the space,
NextEra Energy (NEE) is one of the stronger players, thanks to surging population growth in its core market of Florida. Last year, NextEra’s revenues rose by 12%, an impressive increase for a utility.
Thanks to rising interest rates, NextEra is still down 17% over the past year. That’s pushed the company’s valuation to under 19 times forward earnings.
Action to take: Shares likely have some upside later in the year when interest rates finally start to decline. At current prices, shares pay a 3.3% dividend.
For traders, the June $70 calls, last trading for about $1.35, could see mid-to-high double-digit returns on a further rally higher in the weeks ahead.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.