Unless You're a Contrarian Investor, Don't Buy These Utilities

Includes: AT, CHG, CPL, MGEE, SJW
by: George Fisher
Just as critical as finding outperforming investments is staying away from others.
Listed below are the top five broker “Sells” for the utility sector:
Atlantic Power Corp – AT
CH Energy Group – CHG
CPFL Energia SA (Brazil) – CPL
MGE Energy – MGE
SJW Corp – SJW
The contrarian investor may find interesting aspects of each and at current valuations could develop a positive investment thesis. For instance, Atlantic Power, a Canadian-based power generator, offers a 7.1% current yield paid monthly, and is valued at a 2011 PE of 15, based on earnings estimates of $0.97 per share. However, most retail investors tend to follow the pack, and these companies are far from the lead.
While analysts’ recommendations are not always right, and cynics claim there is the potential for retail investor exploitation, investors should at least be aware of current Street consensus. For example, one Wall Street analyst from a major firm made a half billion dollar math error in calculating operating cash flow of a small-cap oil and gas E&P company. This miscalculation was greater than the market cap of the company at the time. Based on the error, the firm issued a downgraded recommendation, and although the blunder was corrected in subsequent publications, the recommendation remains unchanged. As a runner in a large bond deal just a few months prior, the firm is assumed to have great insight into the company and the recommendation should carry a lot of weight. However, much to the chagrin of the analyst, share prices have doubled since the original downgrade report, and the stock is now trading at twice this analysts’ target price.
However, going against the grain presents unnecessary headwinds for the non-contrarian. Stocks currently rated as “Sell” will find few brokers suggesting investors pile on, and their advise would probably be: there is better value elsewhere. Since many investors follow their broker’s advice, analysts do move money and drive interest to and from specific stocks. On the other hand, if these stocks have hit “bottom”, comparably speaking, when whatever ails the company is corrected, interest could return. With this improved interest should come higher share prices.
Acknowledging broker “Sell” recommendations is not the same as blindly following them. For contrarian investors, this is where they may start looking for opportunities.
As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.