We may be headed into a renewed market slump. If so, it will pay to wait before buying, but when the time does come to buy, here are 5 electric transmission stocks I have my eye on.
On June 2, I wrote that I thought the market was near its peak. That day, the S&P 500 closed at 944.74. On June 12, it closed up 0.15% at 946.21, and has since trended down, currently trading down 5% as I write. I expect further declines this year, either with the market heading straight down from here, or bouncing around for a while, possibly for a few months, before declining in earnest.
This article continues my Clean Energy Stocks Shopping List series, which I started with the intent of occupying myself while I wait for the market to fall. Like most people, I find it difficult not to buy when I find a company I'm interested in, even if I don't like the valuation. I find planning my future purchases lessens the need to use the cash I've been accumulating now, and possibly will be of some help to readers in the meantime. So far, I've brought you five clean transport stocks, and five energy efficiency stocks. I have enough others for about three more lists, which you will be able to find here as they are published.
When I'm done, you should have enough to put together a diversified portfolio of companies involved in what I consider the most promising clean energy sectors. In other words, don't expect any Algae Biofuel stocks (I like the industry, but not the stocks) or Hydrogen Fuel Cell Stocks (I'm skeptical about the economics of the technology.)
I'm not skeptical about either the electric transmission industry or the technology. As a century-old industry, it contains many mature, profitable companies, but the need to build out and enhance our existing (and rather decrepit) electric grid in order to integrate renewable energy means that there are also exciting opportunities for growth. Here are five.
#1 General Cable (NYSE:BGC) produces exactly what you'd expect: cable of all sorts, for electrical transmission, wiring, and communications. If you believe (as I do) that the long term decline in the use of fossil fuels will mean the increasing electrification of the economy, General Cable is the one company I'd point to as most likely to benefit from the trend. The company is solidly profitable, with a forward P/E of 10, almost $4 of cash per share, and strong operating cash flow.
#2 ABB Group (NYSE:ABB) is a global technology firm based in Switzerland with products focused on electrical transmission and distribution, and one of two global leaders in High Voltage Direct Current [HVDC] transmission (the other is Siemens (SI).) HVDC is the best currently available technology for transporting large amounts of electricity over long distances, and is essential to the hoped for European Destertec Project, and would likely be necessary if we were to use concentrating solar power in the US Southwest as dispatchable power to balance variable renewable energy in the rest of the US.
On a more prosaic level, ABB also has technology to improve the efficiency of electricity distribution as well as transmission. The company currently trades at a P/E of 12.6, has $3 cash per share on the balance sheet, strong operating cash flow, and pays a dividend over 3%.
The companies which will contract to build out the new electric infrastructure seem most likely to be able to leverage the build-out to achieve high levels of growth, and hence large gains in stock price. Here are three:
#3 Pike Electric (NYSE:PIKE) performs service and upgrade of electric transmission and distribution throughout the US. Although the company has a strong balance sheet and cash flow, analysts expect earnings to drop significantly next year. If lower earnings materialize, we can expect significant price deterioration (especially in the context of an overall market decline,) and may be able to purchase this stock at an attractive valuation. The forward P/E is currently over 17 at a stock price of $11.60. The relatively high valuation makes Pike likely to be hit hard by a general market decline, leading to an excellent buying opportunity.
#4 MasTec (NYSE:MTZ) not only builds and maintains transmission and distribution infrastructure, they also provide those services for fiber optic communications networks, as well as wind farms. Mastec is less well capitalized than ABB and General Cable, but still has a strong balance sheet and cash flow, and it currently trades at a more attractive valuation than Pike, with a P/E of only 11.6. As such, it's an interesting wind and transmission play.
#5 Quanta Services (NYSE:PWR) No stock list of mine is complete without Quanta Services, which was once described to me by an industry insider as the company to call if you want to put steel in the ground on a transmission project. Quanta has a strong balance sheet (strong cash flow, $2.65 cash per share, and a current ratio of 3.3,) but its high growth means that it trades at the relatively rich forward P/E ratio of 18.6. Like Pike, a general stock market drop should hit Quanta disproportionately, providing an excellent buying opportunity.
DISCLOSURE: Tom Konrad and/or his clients own BGC, ABB, SI, PIKE, MTZ, and PWR.