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.