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Deep Dive: These 10 stocks from a sector that is a bear-market bulwark have upside potential of up to 30%

During times of uncertainty, it can help to look at what happened during other down cycles for stocks.

True, we don’t know when the stock market will hit bottom during this cycle, or if it already has. But you might want to tilt toward a sector that has fared well during previous downturns. You might miss out on some recovery upside, but you might also lower your risk.

So which groups of stocks fared the best from a market top through a bear-market bottom and back to good times when new highs were set?

One might look to the previous recession, brought about by the coronavirus pandemic in 2020. But that market downturn reversed quickly when investors realized the Federal Reserve and federal government would provide unprecedented stimulus to help consumers and businesses survive. Let’s look further back.

This is what happened from the S&P 500’s SPX, -0.08% then-record closing high on Sept. 20, 2018, through the benchmark index’s bear-market closing low on Dec. 24, 2018, and then through April 23, 2019, when it resumed setting new all-time highs.

The chart shows the 11 sectors of the S&P 500, sorted by how well they performed (excluding dividends) through the entire 2018-2019 bear market and recovery cycle, with the full index and continuous front-month quotes for West Texas Crude Oil CL.1, -2.36% at the bottom:

Price change – full cycle, from Sept. 20, 2018 through April 23, 2019 Price change from cycle bottom on Dec. 24, 2018 through new closing high on April 23, 2019 Price change from closing high on Sept. 20, 2018 through cycle closing low on Dec. 24, 2018
Utilities 9% 11% -2%
Communication Services 7% 29% -17%
Real Estate 7% 19% -10%
Information Technology 5% 37% -23%
Consumer Staples 3% 17% -11%
Consumer Discretionary 2% 32% -23%
Industrials -1% 31% -24%
Financials -5% 23% -23%
Materials -5% 22% -22%
Health Care -7% 8% -14%
Energy -8% 27% -28%
S&P 500 0% 25% -20%
Crude Oil WTI (NYM $/bbl.) Continuous -6% 56% -40%
Source: FactSet

The bottom line: the utilities sector declined the least through the bottom of the 2018 bear market and rose the most for the entire cycle.

So far in 2022, here’s how the sectors have performed from the S&P 500’s closing record on Jan. 3 through the close on July 6:

Price change from S&P 500’s record closing high on Jan. 3 Closing price – July 6, 2022 Closing price – Jan. 3, 2022
Energy 20% 522.60 435.83
Utilities -1% 356.31 360.29
Consumer Staples -6% 758.08 804.55
Health Care -7% 1,513.46 1,627.82
Industrials -17% 738.19 887.59
Materials -18% 459.75 561.82
Real Estate -19% 259.28 321.63
Financials -20% 527.00 658.13
Information Technology -26% 2,276.11 3,086.75
Communication Services -28% 193.09 268.97
Consumer Discretionary -32% 1,121.30 1,655.17
S&P 500 -20% 3,845.08 4,796.56
Crude Oil WTI (NYM $/bbl.) Continuous 31% $98.53 $75.21
 

The energy sector has fared best, aided by the 31% increase in oil prices. However, it hit its own bear market in the past month amid recession fears and a pullback in crude.

But the utilities sector has shined again, while featuring a weighted estimated annual dividend yield of 3.13%, based on consensus estimates among analysts polled by FactSet.

There is something to be said for being paid to wait through a bear market, while receiving dividends that put you in the black as seven sectors and the entire index suffer double-digit declines.

From Mark Hulbert: Dividend stocks are a top inflation-fighting investment you want in your corner now

One easy way to invest in the space is the Utilities Select Sector SPDR Fund XLU, -0.33%, which holds all the stocks in this sector of the S&P 500.

Screening the ‘bulwark’ sector

But you might want to dig into the 29 stocks in the S&P 500 utilities sector. Here at the 10 with majority “buy” or equivalent ratings among analysts polled by FactSet that have the most upside potential implied by consensus price targets:

Company Ticker Share “buy” ratings Closing price – July 6 Consensus price target Implied 12-month upside potential Dividend yield
AES Corp. AES, +0.42% 86% $21.04 $27.41 30% 3.00%
Constellation Energy Corp. CEG, +0.91% 87% $56.76 $70.07 23% 0.99%
FirstEnergy Corp. FE, -0.27% 53% $37.44 $46.16 23% 4.17%
Edison International EIX, -0.40% 53% $62.25 $74.87 20% 4.50%
Public Service Enterprise Group Inc. PEG, -0.54% 64% $62.98 $74.89 19% 3.43%
Sempra Energy SRE, -0.28% 65% $147.46 $173.56 18% 3.11%
PPL Corp. PPL, -0.26% 53% $27.05 $30.73 14% 3.33%
American Electric Power Co. Inc. AEP, -0.19% 69% $94.80 $107.43 13% 3.29%
NextEra Energy Inc. NEE, -0.16% 65% $79.57 $90.06 13% 2.14%
CenterPoint Energy Inc. CNP, +0.20% 80% $29.34 $32.97 12% 2.32%
Source: FactSet

Click the tickers for more about each company.

One easy way to begin further research, if you are interested in any of the stocks is to make use of the MarketWatch ticker page. Click here for Tomi Kilgore’s guide to this tremendous free resource.

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