Consumer Confidence Climbs But Economic Woes Remain: 4 Utility Picks

Consumer confidence rose 0.8 points to 91.8 in March (vs. 88 expected) while 12-month inflation expectations jumped to 5.2% from 4.5%; job openings fell by 358,000 and hiring declined by 498,000 to 4.849 million, with unemployment up to 4.4%. Oil prices have surged over 50% in the past month amid the Iran conflict, increasing macro uncertainty. Zacks recommends buying five defensive utility names (ATO, AWR, FTS, NI) citing 60-day upward revisions to consensus earnings estimates (+0.5% to +3.1%), expected FY earnings growth of roughly 5.1%-10.2%, low betas (0.49–0.74) and dividend yields near 2.2%–3.35%.

Analysis

Regulated utilities are the classic defensive play into a macro regime of sticky inflation expectations and episodic energy-price shocks, but the non-obvious lever is rate-base revaluation: sustained higher input costs and higher nominal capex to harden networks typically accelerate rate cases and create a 6–18 month window for allowed-ROE resets that can re-rate companies with transparent regulatory tracks. Firms with visible, near-term rate cases or formula-rate mechanisms will capture margin upside faster than utilities reliant on multi-year traditional filings.

Second-order winners are the capital goods and services providers to utilities (pipeline contractors, meter vendors, grid hardening contractors) because rising oil/gas inflation pushes utilities to front-load maintenance/capex; conversely, non-regulated merchant generators and municipals with fixed-rate revenue streams are more exposed to a rising-rate shock that compresses valuations. Labor-market softening reduces near-term O&M risk, which is a subtle offset to material input inflation for distribution-heavy operators.

The biggest tail risk is a rapid rates re-pricing (2–3 month event) that increases discount rates on long-duration utility cash flows and forces equity weakness before regulators can adjust ROEs; a second tail is a political/regulatory backlash to outsized allowed returns that delays recoveries. Monitor 10y Treasury moves, upcoming state rate-case calendars, and guidance cadence over the next 90–270 days for triggers that flip the thesis.

Key Decisions for Investors

• Long NI (NiSource) 12-month target +20% total return (price + ~3.4% dividend). Size 1.5% portfolio. Rationale: near-term rate-case visibility and low beta; stop-loss -12% (rate shock/regulatory delay).
• Long ATO (Atmos Energy) 9–12 months: buy shares or buy 9–12 month 5–10% OTM calls (leverage). Target +18% upside driven by earnings re-rating if capex pass-through confirmed; downside -15% on sustained commodity spike that pressures merchant exposures.
• Pair trade: Long FTS (Fortis) and short XLU equal notional for 6–12 months. Net exposure to idiosyncratic regulatory re-rating while hedging broad utility-duration risk. Expect relative outperformance of FTS by 8–12% if ROE adjustments materialize; close if 10y Treasury rises >75bp in 30 days.
• Hold AWR (American States Water) as a defensive sleeve for 18–24 months: buy on pullbacks to its 200-day MA with a target total return +12% (dividend + modest multiple expansion). Use position as liquidity ballast against a transient rates-driven selloff.
• Risk hedge: buy 3–6 month put protection on the utility index (e.g., XLU 3-month puts) sized to cover 30–50% of the above long positions if 10y Treasury breaks above 4.5% — protects against rapid duration repricing that precedes regulatory adjustments.