Published: September 11, 2009

In the last six months the S&P 500 has been on a tear, rocketing +42%. But while the masses celebrate their investment gains, that overreaching rebound has smart investors pretty nervous. That’s why it’s time to turn to a recession resistant industry that’s set to soar right now -- today, I’m going to give you the names of the two investments that are best positioned to profit in the process. More on that in a minute...

It seems like utilities are the only industry that haven’t had a great year in 2009. That’s a shocking fact for many investors who counted on stable recessionary profits from utilities stocks.

In the past, utilities have been touted for their recession resistance. Brokers even went so far as to call them “widow-and-orphan stocks” because as USA Today’s John Waggoner puts it, “A stockbroker could sell utilities stocks to old Widow Brown (or Orphan Annie) without worrying that the townspeople would someday chase him down Main Street with dogs and torches.”

The torches would certainly have come out in 2008 when the sector shed -27% of its value -- and again this year, when utility stocks lost another -30% as the S&P 500 rebounded by +15%.

Indeed, while the average publicly traded stock has increased in valuation by +40% since March, utilities have only seen a +24% reprieve from the depths of the market’s lows.

Believe it or not, that’s exactly why one subset of the utilities industry is such an attractive investment right now.

Why an Industry Mired in Doubt Could Pave Your Path to Profits
Don’t get me wrong; there are plenty of reasons to continue to stay away from the utilities sector as a whole. Utilities stocks are slow growing, they deal with all of the drawbacks of extensive government regulation, and with interest rates again on the rise, the cost of capital is liable to increase dramatically for the second-largest corporate borrower behind the financial sector.

But each of those arguments against investing in utilities is a double-edged sword that falls short when it comes to international utility stocks.

That’s because international utilities that operate in emerging markets are actually growing at a breakneck pace as countries like China and India develop their infrastructure and deliver things like electricity and clean water to their citizens. Overseas, where in many cases utilities have more say in the regulatory process, these companies act like government-sponsored monopolies.

And with dovish economists nervous to overcompensate on the interest front, it’s unlikely that any interest rate increases that we see in the next several quarters will materially hurt utilities stocks -- especially those in high-growth areas.

So while domestic utilities continue to be mired with doubt and concern, investing in international utility stocks seems like a pretty exciting recession play right now.

Another of the utilities sector’s biggest draws is dividend income. Historically, utilities are one of the top-paying sectors when it comes to dividends -- yet another reason why they’re so well-liked during recessions. When capital gains dry up during a bear market, dividends can often mean the difference between keeping your head above water and sinking with the ship. Even as utilities staged their disappointing tumble last year, consistent dividend income has lived up to expectations.

International Utility Profits Through ETFs
Naturally, one of the best ways to get exposure to international utilities is through exchange-traded funds (ETFs).

At present the ETF offering for utilities is staggering – from broad based utilities index funds like the Utilities SPDR ETF (NYSE: XLU), which is based on the S&P 500’s utility components to the PowerShares Progressive Energy ETF (NYSE: PUW), which invests in utilities that engage in environmentally friendly practices. But for international exposure, there are only two funds that stand out right now...

First is the iShares S&P Global Utilities ETF (NYSE: JXI). This fund, which is based on the utility components of the S&P 1200 Global index offers investors a good spectrum of international utility stocks as well as the stability of a few domestic plays thrown in. The fund’s top five holdings are all diversified overseas utility providers that operate in emerging and high growth markets, including E.ON AG, GDF Suez, and Enel SpA.

A relatively low expense ratio (0.48%), coupled with a 4.81% dividend yield make JXI a very attractive fund right now.

The other fund worth looking at is the WisdomTree International Utilities Fund (NYSE: DBU), which has thinner volume than JXI and a somewhat higher expense ratio (0.58%), but offers slightly more exposure to small-cap utility plays. Both funds share a very similar investment philosophy and hold many of the same stocks.

A 20% Upside in the Technicals
 

Taking a look at JXI’s chart above, even at first glance it’s pretty clear that this ETF is already in a sustained uptrend, one of the most important things that we look for in any trade. In early July, the stock’s 50-day moving average (the light blue line) crossed over its 200-day moving average (the dark blue line). Moving averages, which chart the average price of a stock over a given number of days, give us a glimpse at how a stock is trending relative to its past. Seeing a shorter-duration moving average cross over a longer-duration average is a bullish signal that suggests the real uptrend is only just beginning in the stock.

What’s also significant to us is the trading channel that JXI finds itself in right now. The fund has been bouncing in the same channel since March, and is currently toward the bottom of the channel, primed for a bounce back to the top. If this stock follows the pattern that its been exhibiting for the last six months, there could easily be a +20% upside on a JXI play.

As you might expect from such a closely related fund, DBU’s chart is nearly identical to JXI’s... That means that these two ETFs can be traded interchangeably.

From a fundamental perspective, it’s clear that international utilities are being undervalued by investors right now. And from a technical perspective, these two ETFs look primed to take off in the short term with a potential +20% upside for investors willing to take the plunge.

-- Jonas Elmerraji
Contributing Editor
PennySleuth.com

Editor's Note: This article originally appeared in Penny Sleuth.