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The best-performing stocks in the market are usually those stocks with the highest growth rates or the highest expected growth rates. However, during the past 85 years, value stocks outperformed growth stocks by 39 basis points per month on average (see details here). Therefore, investors should still invest a certain amount of their money in value stocks rather than invest only in growth stocks. The reason why value stocks beat growth stocks is simple. Analysts usually estimate value stocks to have low or even negative growth rates, while they expect growth stocks to grow at higher rates for long periods of time, and such expectations are reflected in the stock prices. It is relatively easy for value stocks to beat the analysts' estimates. On the other hand, it is more challenging for growth stocks to beat the high expectations, and when they miss their estimates, they will fall like a rock. Netflix's (NFLX) 75% decline a few months ago is a good example of this.

Below, we ranked US utilities companies based on their expected five-year growth rates. All companies have at least $7 billion market cap. The data is sourced from Finviz. Contrarian investors should focus on the stocks that are at the top of the table. We also like stocks with high expected growth rates and low P/E ratios.

Ticker

Company

Forward P/E

EPS growth

(AEE)

Ameren Corporation

13.47

-0.05%

(ETR)

Entergy Corporation

11.75

0.20%

(EXC)

Exelon Corporation

12.9

1.65%

(PEG)

Public Service Enterprise Group Inc.

12.19

2.50%

(PCG)

PG&E Corp.

12.51

2.85%

(FE)

FirstEnergy Corp.

12.47

2.88%

(EIX)

Edison International

15.92

3.11%

(DTE)

DTE Energy Co.

14.12

3.61%

(AEP)

American Electric Power Co., Inc.

12.79

3.63%

(ED)

Consolidated Edison Inc.

15.16

3.65%

(PGN)

Progress Energy Inc.

16.78

3.67%

(DUK)

Duke Energy Corporation

14.78

3.85%

(D)

Dominion Resources, Inc.

15.48

4.33%

(XEL)

Xcel Energy Inc.

14.65

5.04%

(PPL)

PPL Corporation

11.33

5.20%

(CNP)

CenterPoint Energy, Inc.

15.36

5.73%

(CEG)

Constellation Energy Group, Inc.

14.54

5.75%

(NEE)

NextEra Energy, Inc.

12.95

5.80%

(SO)

Southern Company

16.63

5.91%

(SRE)

Sempra Energy

12.61

7.14%

(WEC)

Wisconsin Energy Corp.

11.66

7.60%

(OKE)

ONEOK Inc.

23.77

7.77%

(AES)

The AES Corporation

9.88

10.53%

(EQT)

EQT Corporation

21.61

25.67%

It seems that Ameren Corporation (AEE) has the highest upside potential among large-cap US utilities stocks. Analysts estimated Ameren's EPS to decline by 0.05% per year over the next five years. Therefore, as long as the earnings of the company did not decrease, it will beat the analysts' expectations. The utility holdings company reported net income of $285 million for the third quarter of 2011, compared with $167 million net loss for the same quarter of 2010. AEE has a market cap of $7.6B and a forward P/E ratio of 13.47. During the third quarter, Jim Simons' Renaissance Technologies significantly boosted its AEE stakes by 102%. As of September 30, 2011, the fund had $30 million invested in AEE.

Entergy Corporation (ETR) also has high upside potential. It is expected to grow at only 0.20% annually over the next five years, which is relatively easy to beat. Entergy is mainly engaged in the production of electric power and the distribution of retail electric. It reported net income of $633 million for the third quarter of 2011, up from $498 million for the same period a year ago. ETR has a market cap of $12B and a forward P/E ratio of 11.75. As of September 30, 2011, Jean-Marie Eveillard's First Eagle Investment Management had $215 million invested in ETR. Cliff Asness' AQR Capital Management also invested $27 million in this position at the end of September.

Another large-cap utilities stock with potentially high upside potential is Exelon Corporation (EXC). The company reported third-quarter net income of $601 million in 2011, compared with $845 million for the same quarter a year earlier. EXC has a market cap of $26B and a forward P/E ratio of 12.9. As of the end of September 30, 2011, there are 23 hedge funds disclosed to own EXC in their 13F portfolios. For example, Jim Simons' Renaissance Technologies initiated a brand new $64 million of EXC over the third quarter. Steven Cohen's SAC Capital Advisors also invested $51 million in the stock at the end of September.

The stocks at the bottom of the list, such as EQT (EQT) and ONEOK (OKE), have relatively large forward P/E ratios. Both stocks' forward P/E ratios are greater than 20. There are some exceptions, though. For example, AES (AES) has a forward P/E ratio of 9.88, the lowest among stocks listed above. Stocks at the top of the list have relatively low forward P/E ratios. The top 10 stocks on the list all have forward P/E ratios of lower than 16, indicating that they are very likely to be trading at discounts. We encourage investors to focus on these utilities stocks with the highest upside potential and do some in-depth research on these stocks.

Source: Top Utilities Stocks With The Highest Upside Potential