Trading Nation

This sector just had a historic run – but may no longer be an attractive pick

Utilities sector surges

The utilities sector just logged four-straight weeks in the green, and is positive on the year, but some market watchers say names in the space might not be the best picks right now.

The exchange-traded fund tracking the utilities sector (XLU) rose 4 percent last week for its best one-week performance since summer of 2015, leading the market as the best-performing sector for the week.

But Erin Gibbs, equity chief investment officer at S&P Global, said that while the sector isn't very expensive at current levels — trading slightly above its three-year forward price-to-earnings ratio — it is expected to yield the worst profits growth this year.

In fact, utilities are the only group expected to yield negative or contracting profit growth for 2017, according to S&P Global data.

"That, combined with potentially raising interest rates — that hurts utilities on a two-fold basis. One, it makes dividend yields look less attractive; and two, they're capital-intensive — they're going to have higher borrowing costs. So we just don't see it as a strategic play for 2017," Gibbs said Friday on CNBC's "Trading Nation."

Funds currently have record underweight positioning in staples and utilities — two traditionally defensive sectors — and near-record lows in telecom, according to a new report from Bank of America Merrill Lynch's U.S. equity and quantitative strategy team.

The rise in utilities stocks comes as bond yields sink, with the 10-year Treasury yield approaching a three-month low on Friday. A direct relationship between Treasury yield and high-dividend stocks may or may not make economic sense, but it remains the case that when bond market returns become less attractive, investors appear to show a preference for high-dividend payers. The XLU offers a yield of more than 4 percent, more than double that of the ETF SPY, which tracks the whole .

Integrated power company NRG Energy is the best-performing stock in the sector so far this year, up 42 percent. Shares of the stock surged last week after Paul Singer's Elliott Management said it has partnered with investment firm BlueScape Energy Partners to push for changes at the NRG.