Although the stock market has been improving over the past week, there is still a lot of uncertainty and energy stocks are a relatively safe bet in a volatile market. With high dividend yields and virtual monopolies in the spaces they operate in, energy companies are generally profitable and can dole out strong dividend yields. With the recent bankruptcy of Solyndra, we have seen how alternative energy companies are not quite ready to take over as America's major source of power. In this article, I name my three favorite energy companies and provide some analysis about each one.
Constellation Energy Group (NYSE:CEG): Constellation Energy is based in Baltimore and operates in 11 states including California and a lot of the Northeast. Founded in 1816, it is one of the oldest and largest energy companies in the United States and Exelon (NYSE:EXC) is planning on closing a merger with Constellation Energy by mid 2012. It has been the top stock pick of my ranking algorithm for three months and has dropped 2.64 percent during this time compared to a market drop of over 11 percent.
When the deal with Exelon closes, shareholders will receive .93 shares of Exelon for each share of CEG. At the close of trading on October 10th, shareholders would receive a 4.86 percent return for the deal closing. This difference stems from the uncertainty of the deal actually closing, but a stake in Excelon and a 4.86 percent bonus if the acquisition closes provides a lot of value for CEG shareholders.
First Energy (NYSE:FE): First Energy is America's largest investor owned electric system and has been a favorite of my ranking algorithm. Based in Akron, Ohio, it operates the majority of its business in the Northeast and the Midwest. FE is one of the few stocks to increase in price over the past three months and much of its returns stem from consistently beating the market rather that just one positive earnings report. I believe that First Energy can continue to outperform the market.
Consolidated Edison (NYSE:ED): Con Ed is famous for being the energy company of New York City and some of the surrounding suburbs. Of the three stocks on this list, Con Ed has had the best relative performance, increasing in price by 6.83 percent over the past three months. In addition, the company is one of the few energy companies expected to have increased earnings over the next two years, moving form an adjusted $3.45 per share in 2010 to an adjusted $3.69 in 2012. In addition, a coworker of mine met Jim Cramer last week and his stock recommendation to her was to buy Con Ed.
Energy companies tend to have pretty good dividend yields and consistent earnings since energy is a necessity today and they have a very stable customer base. The big risk of holding energy stocks is that if the market rebounds and experiences huge gains over the next few months, energy stocks may not be able to have significantly high gains because they are not volatile enough. When considering all directions that the market can take, I believe that energy stocks are a great bet.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.