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A Rare Opportunity in Utilities: Pro

Monday, 17 Jun 2013 | 1:19 PM ET
A Rare Opportunity in Utilities: Pro
Monday, 17 Jun 2013 | 12:35 PM ET
Utility stocks are "extremely cheap" compared to bonds and could see returns approaching 10 percent, Fidelity Portfolio manager Douglas Simmons says.

Utility stocks are "extremely cheap" compared to bonds and could see returns approaching 10 percent, Fidelity Portfolio Manager Douglas Simmons said Monday.

Simmons, who oversees the $5 billion Fidelity Select Utilities Portfolio (FSUTX), noted that the sector had experienced a 10 percent correction from its April highs.

"But if you look just at the month of May, the group actually underperformed the S&P by 12 percent – in one month," he said. "The last time we saw underperformance of that order of magnitude was over a decade ago in November of 2011."

On CNBC's "Fast Money," Simmons said that the sector offered strong returns, with a dividend yield of 4 percent and earnings growth of 5 percent.

"Historically speaking, a 10 percent return is a competitive return in any rate environment and especially, certainly over time," he added.

(Read More: 2 Taper-Proof Stocks)

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Simmons called the sector "already extremely cheap compared to bonds," with the dividend yield twice that of the U.S. Treasury 10-year bond.

"In the 50 years leading up to the Lehman bankruptcy, there were only three times that the dividend-yield sector yielded more than the 10-year bond," he said. "Each time was a tremendous opportunity to buy the sector."

Simmons said that he saw a rare opportunity.

"I think what the market's telling you is that the group's already pricing in some degree of rising rates, and it's viewing this 2 percent 10-year bond yield as largely an aberration," he said.

Simmons's top five holdings included Duke Energy, American Electric Power, PG&E,Sempra Energy and CenterPoint Energy.

In response to a question regarding CenterPoint Energy's stock price, which was 17 times forward earnings, Simmons said, "I think investors are saying they're willing to pay up for this sustainable long-term trend in growth and trend in dividend growth."

(Read More: Are Investors Overconfident in the US?)

Trader disclosure: On June 17, 2013, the following stocks and commodities mentioned or intended to be mentioned on CNBC's "Fast Money" were owned by the "Fast Money" traders: Joe Terranova is long VRTS; Joe Terranova is long SJM; Joe Terranova is long AAPL; Joe Terranova is long SPLK; Joe Terranova is long GLD; Joe Terranova is long TBT; Joe Terranova is long SWN; Joe Terranova is long GOOG JUNE 870 PUTS; Joe Terranova is long GS JUNE 165 PUTS; Joe Terranova is short MINI S&P FUTURES; Stephanie Link is long AAPL; Stephanie Link is long GS; Stephanie Link is long JPM; Stephanie Link is long WF; Stephanie Link is long FB; Stephanie Link is long WY; Stephanie Link is long CSCO; Stephanie Link is long HIG; Josh Brown is long AAPL; Josh Brown is long C; Josh Brown is long TLT; Josh Brown is long XLF; Mike Murphy is long LEN; Mike Murphy is long FB; Mike Murphy is long INTC.

  Price   Change %Change
UTILITIES
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S&P 500
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US 10-YR
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DUK
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AEP
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PCG
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SRE
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CNP
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