Deutsche Bank: Utility Sector Won't Repeat FY14 Outperformance

Utility stocks' value should hold up next year, but are unlikely to stage a repeat performance of 2014, when the sector's average 10 percent return beat the overall market by a few points, an analyst said Wednesday.

Deutsche Bank's Jonathan Arnold generally praised independent power producers, which sell electricity to utilities, and advised caution in more heavily regulated public utilities, where higher interest rates could prove particularly painful to investors.

Arnold said he has "a hard time seeing utilities as a group replicating 2014's relative gain" absent a major correction in the larger stock market.

Citing the potential for higher interest rates on the public utilities segment, Arnold downgraded Consolidated Edison, Inc. ED to Sell, from Hold and cut PG&E Corporation PCG and Portland General Electric Company POR to Hold from Buy.

Among independents, Arnold said a recent selloff related to lower oil prices offers an "attractive entry point" and noted that power prices have held up better than the underlying commodities.

"The disconnect between stock prices and business fundamentals offers an interesting opportunity," Arnold said.

Arnold upgraded independent producers Calpine Corporation CPN to Buy from Hold and maintained Buy ratings on Dynegy Inc. DYN and NRG Energy Inc. NRG.