Electric Utilities: Now a Screaming Buy?

A news headline out of Capitol Hill Tuesday makes the Electric Utilities a Screaming Buy. Senator Kent Conrad (D), the Senate Budget Committee Chairman said Tuesday that Obama’s budget does not have the votes to pass through the Senate in its present form.

Of particular concern for many of the Senators is the carbon cap-and-trade provisions that will place very costly legislation onto the production of electricity generation and hit the utilities very hard. Chart work shows a rapid sell-off in most all the utilities experienced when the budget was introduced. Just a brief review of the charts of the largest utilities in the country (NYSE: SO, FPL, ED, D, DUK, ETR, EXC, FE, AEE, AEP, AYE, PEG, PPL and PGN) showed dramatic declines in these stocks over the past 3 weeks.

With Tuesday's market rally in the financials sparking a 379 point rally in the Dow the market tide has turned, at least in the short run, and a rally over the next week or so is expected. Buying into these oversold utilities will prove to be profitable.

Since the close of trading on February 6th the following declines in utilities:

• SO - down 18.87%, PE = 12.12, PEG = 2.37
• FPL - down 17.11%, PE = 10.66, PEG = 1.17
• D - down 24.15%, PE = 8.87, PEG = 1.14
• DUK - down 20.98%, PE = 11.54, PEG = 2.53
• ETR - down 15.28%, PE = 10.16, PEG = 1.04
• FE - down 28.47%, PE = 8.67, PEG = 0.9
• AEP - down 25.62%, PE = 7.23, PEG = 2.17
• PPL - down 23.94%, PE = 10.23, PEG = 1.12
• PGN - down 20.79%, PE = 10, PEG = 2.12
• AEE - down 40.47% (note: earnings miss on Feb 13th), PE = 6.97, PEG = 1.78
• EXC - down 26.36%, PE = 10.30, PEG = 1.25
• ED - down 17.90%, PE = 7.75, PEG = 4.38
• AYE - down 39.22% , PE = 9.02, PEG = 0.44
• PEG - down 23.28%, PE = 10.73, PEG = 1.36

As the PEG ratio incorporates the P/E (lower the better) and what we are looking for is bounce-back potential (higher the better) combined with favorable fundamentals, one way to compare all these utilities may be to divide the sold off percentage by the PEG.

This makeshift ratio gives us the following leaders:

• AYE - 89
• FE - 31.63
• AEE - 22.73
• PPL - 21.375
• D - 21.18

Throwing out AEE for complications and a more rapid sell off resulting from its recent earnings miss and also noting that FE beat earnings on March 2nd ($1.04 actual vs. $0.87 expected) leaves us with…Buys on FE, AYE, PPL and D.

Comments

[GD:]

Robert,
A very short term incomplete naive look.
The trend is demand/growth dropping, revenues as well, CAPEX cuts, Exec Bonuses, and salaries flat. Divs cut.
Doesn't bode well for "Screaming Buys"
Are we on the same planet???

Mar 11 10:53 AM

[bindlepete:]

Lot of good fresh meat out there. Who else has guaranteed earnings and steady dividends?

Mar 11 12:42 PM

[Robert Perrego:]

GD

Not talking about a buy and hold here. Just as this bear market rally is pooping the financials as they may finally be oversold, a let up on the cap and trade will rebound the utilities. The utilities got sold off very hard and will see a rise. I do not play buy-and-get-hit-by-a-t...

We get a decent bear market rally here and three sectors will perform the best inside this rally - banks, tech and utilities.

Mar 11 05:19 PM

[Robert Perrego:]

BPete

good comment on the dividend. In a market as uncertain as this one a stock that pays you to hold it is a nice place to hide.

Mar 11 05:20 PM

[GD:]

Robert,
You are NOT amazing. You say "Screaming Buy", and the "Not talking about buy and hold".
Sounds like your one [of many ] who confused the investing public, and took them down with your advice.
Your resume is long, but maybe an anchor for you.
IE
"Not talking about a buy and hold here. Just as this bear market rally is pooping the financials as they may finally be oversold, a let up on the cap and trade will rebound the utilities. The utilities got sold off very hard and will see a rise. I do not play buy-and-get-hit-by-a-t...

We get a decent bear market rally here and three sectors will perform the best inside this rally - banks, tech and utilities".

Mar 11 08:48 PM

[ArtfulDodger:]

Robert:

Re the left not having the votes to pass cap&trade, well if you remember they had them even before they garnered more power (and votes) at the last election when they passed cap&trade and Bush vetoed it --- as best I remember.

Mar 12 08:35 AM

[Robert Perrego:]

took who down with my advice GD?

Buy and hold is dead and I never believed in it anyway. How many companies are even around percentage wise over 20 years and profitable? Like 5%. That is picking a needle in a haystack and I prefer to buy oversold and sell overbought. I make a lot more money that way.

If you are one of the lazy people that wants to buy a stock and put it under the mattress for 2o years you will most likely lose money and if you are lucky enough to pick the next Microsoft you could retire - but the other 8 stocks you pick will go out of business and you better hope you have a Microsoft in there or you will end up with nothing.

Want to buy walkman? how about a tobacco company? what about kodak? everyone needs film right?

I confused the investing public? get real.

I never recommend buy and hold - it is for the stupid and lazy. Stick and move and do your homework. Ask warren - he is getting slaughtered this year. i have beat his return year in and year out since I started day trading and that was not even 'buy and hold overnight'.

Mar 12 09:44 AM

[Robert Perrego:]

Dodger - they don't have them now as per the story I read. Economy is in the toilet and that cap-and-trade crap will do nothing but place a regressive tax on the poor.

Mar 12 09:44 AM

[fran:]

please preface your article with timeframe for action/meaning. then GD may be better informed on your intent.

there are some "greener" utilities which could benefit from cap/trade. FPL comes to mind--little coal, some NG and nuke.lotsa wind, growing solar big time, high scores on customer efficiency programs. much opportunity to sell credits[TO eg. SO, DUKE]. same might hold for Pacific gas/elect, eg.

i also would not rule out some strong move on a form of C tax. too much pressure from worldwide sources[even USA utilities]. examine sen Conrad's reasonings deeply.


On Mar 11 05:19 PM Robert Perrego wrote:

> GD
>
> Not talking about a buy and hold here. Just as this bear market rally
> is pooping the financials as they may finally be oversold, a let
> up on the cap and trade will rebound the utilities. The utilities
> got sold off very hard and will see a rise. I do not play buy-and-get-hit-by-a-t...
>
>
> We get a decent bear market rally here and three sectors will perform
> the best inside this rally - banks, tech and utilities.

Mar 12 09:47 AM

[Robert Perrego:]

Fran,

EXC has highest % of nuclear power but still burns an awful lot of coal. cannot get around it - US has more coal power than saudi arabia has oil. All the utils are built around coal. Period.

As far as time frame - they utils are oversold more than the market is. We get a bear market rally and they pop up faster - maybe make 15% on the trade. Market is a bear market. Picked a combination of those with the lowest PEG as they will go down slower than overpriced ones fundamentally, but if you noticed I picked the ones with larger sell off's for bounce backs. never said anywhere this was an investment - just a buy and when trading you move fast hence screaming.

Only stocks I would hold for more than three months these days - GOLD. EVERYTHING ELSE IS GOING LOWER,

Mar 12 10:11 AM

[Robert Perrego:]

Fran - I appreciate that comment. thanx. When trading a stock that you say is OVERSOLD, I assumed the reader would know that the play is the reversion to the mean and not a buy and sell when you have 5 more grand kids. In the future I will be more attentive to this so as not to confuse those less active in the market.

Mar 12 10:20 AM

[The Little ...:]

Place your bets. It sure beats plane and hotel costs to Vegas.

Mar 12 06:54 PM

[Chabsentia:]

Most Utiltities that had the Credit rating to do do refinanced their Bonds at a much lower rate than before recently .The CBO came out yesterday that the actual Deficit will be 2.3 Trillion dollars then the OBama Budget has stated.I see 10% inflation next year and 10% inflation in 2011 and then a recession to wring it out. Commodiities will begoing up such as Gold , Silver and Oil as well as N.G.,This is why Oil just broke $50 on the News. Any Cap and Trade charges will be passed on to the consumer and part of the Cap and Trade proceeds will be used to pay Electric charges for Low Income people and thus back to the Utilites. How much can you reduce your cooking? Restuarants etc have to use Electricity and will raise their Prices. How much washing Clothes are you going to stop? Are you going to sit around in the Cold in 7 Layers of Clothing rather than heat your House,Are you going to stop taking showers etc. Are you going to stop watching T.V and using your Computers?

Mar 21 05:13 PM

[jarco:]

As a long time follower and investor in public utilities, I find most of the posted comments both of interest and amusing.

The key utility interest of the last decade (or more) was consolidation, followed by operating efficiencies similar to what's occured in many US companies. Outsourcing construction also contributed. Thus, contrary to many "followers", several electric utilities have become cash machines. Yes, they still borrow heavily but those living in a progressive regulatory environments are able to guarantee ROI at very attractive rates. This assures stability, growing dividends, and a must own for retired or soon to be retired investors. And a growing bunch they are. Ownership demand fuels modest price increases which when coupled with relatively high dividends spells success.

Apr 07 12:15 PM