This defensive stock has found favour with investors since the turbulent October market sell-off but Spark Infrastructure Group’s (ASX: SKI) share price is set to keep outperforming the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index in the next two weeks, according to Morgan Stanley.
This could be a good day to buy shares in the power utility if the broker is right as SKI’s share price dipped 0.2% to $2.32 during morning trade when the top 200 stock benchmark is up by 0.3%.
Don’t be fooled into thinking that the volatility is over and that defensive stocks will start to underperform again as they have for most of this calendar year.
You only need to look at the performance of other utilities and infrastructure plays like the Ausnet Services Ltd (ASX: AST) share price, Transurban Group (ASX: TCL) share price and Telstra Corporation Ltd (ASX: TLS) to see what I mean.
Why will Spark Infrastructure’s share price fire up?
There is a 70% to 80% chance that Spark’s share price will run ahead of the market in the next two weeks, according to Morgan Stanley.
“SKI’s near-term distribution yield of ~7% is very low risk, in our view, and in the upper end of stocks in our coverage,” said the broker.
“SKI’s security price equates to an EV/CRAB multiple of ~1.3x, down from ~1.4 earlier this year, and we believe regulatory risks are reflected in the security price, which raises SKI’s defensive appeal.”
A yield of around 7% is attractive for a stock that isn’t under a regulatory cloud. It’s integrated power retailers like AGL Energy Limited (ASX: AGL) and Origin Energy Ltd (ASX: ORG) that are facing the threat of heavy-handed government intervention due to a surge in power prices.
But Spark only owns the power infrastructure and is seen to be further removed from the controversy that is centred more on the retail component of the value chain.
On the other hand, I don’t think the stock makes for a good longer-term bet. It’s too early to be going overweight on defensive stocks as I believe the fog hanging over the ASX will clear and that the bull market will resume charging ahead into early 2019.
The time to be increasing exposure to defensive stocks with stable earnings and low growth is when we are more confident that the bulls are on their last puff.
That may not happen until the second half of 2019, if not later.
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Motley Fool contributor Brendon Lau owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.