Over the past month, small cap stocks have been broadly underperforming their large cap counterparts. These pint-sized securities are often more volatile than their larger brethren and have been hard hit by fears of a sharp downturn in the domestic economy. With that being said, some of the safer corners of the small cap market, namely utilities, have managed to skirt by much of this disaster with minimal losses. These firms have been unscathed thanks to high dividend yields and the non-cyclical nature of the businesses; everyone needs electricity and water. Yet, unfortunately for the sector, the recent relative strength of utilities could be put to the test later today when one of the most important companies in the small cap utility universe reports earnings, Piedmont Natural Gas (PNY).
This small cap firm, which currently has a market cap of just over $2.2 billion, is based in North Carolina and provides natural gas to homes and businesses across the Carolinas and Tennessee. The company has close to a million customers in total and is a major provider of fuel to the region. Piedmont looks to give investors its quarterly update before the bell today, helping investors to see if the recent outperformance of small cap utilities has been matched by solid earnings. Analyst currently expect the company to post a loss of 11 cents a share, although the range is rather wide, stretching from -$0.16 to -$.08.
While the company may still be posting a loss in terms of bottom line figures, the consensus expectations on revenues call for a 3.4% increase, up to $218.8 million for the quarter. Yet, investors should’t hang their hats on this fact alone; besides expectations for the most recent period, top line figures have been falling for the previous three quarters suggesting that Piedmont has its work cut out for itself at today’s report. Furthermore, investors should note that the company has missed earnings expectations in each of the past four quarters, so history is clearly not on the side of this utility firm [ETFs And Sector Rotation: Large Cap, Small Cap, Or International?].
Thanks to this key report, investors should look for the S&P SmallCap Utilities Portfolio (PSCU) from PowerShares to remain in focus throughout today’s trading session. The fund tracks the S&P SmallCap 600 Utilities Index which is comprised of common stocks of U.S. utility companies. These companies are principally engaged in providing either energy, water or natural gas utilities and come from around the nation. The fund currently consists of roughly 23 companies so large weightings are often devoted to each firm. In fact, close to two-thirds of the fund’s total assets go towards the top ten components suggesting a rather high level of concentration [Beyond The SPDRs: Look To Small Caps].
Investors should also note that PNY takes up the top spot in terms of individual holdings, accounting for nearly ten percent of the fund’s total assets. Thanks to this high weighting, the earnings performance of PNY will undoubedtly drive the performance of PSCU to close out the week. Should PNY manage to beat estimates and give solid guidance, investors could see a nice pop in shares of PSCU in Friday trading. If, however, PNY fails to match expectations thanks to the recent hurricane or if the firm looks for weakness in the months ahead, investors could see PSCU’s relative strength over the past few weeks fall by the wayside, leading to a sharp loss for the utility fund to end the holiday-shortened week of trading [see charts of PSCU here].
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Disclosure: No positions at time of writing, photo is courtesy of James Willamor.