6 Utilities Plays For An Overbought Market

 |  Includes: CLNE, CMLP, CNP, CTWS, FE, PEG
by: Richard Saintvilus

In the first part of the article, we looked into five stocks that were making headlines for a variety of reasons. In this article, we are going to look at the concerns surrounding energy and specifically natural gas. The backdrop of these concerns surrounds some of the following macro events that we are about to get into.

The sixth week of trading officially ended Friday with some disappointment. Unlike the prior weeks since the New Year, this week, many of the broader indices lost ground instead of gaining. This reality has caused many investors to wonder if the so called "January effect" that had extended in February is about to come to an end.

Friday brought some profit taking as several of the indices ended lower. It appears that investors seemed undecided which course to take and how to digest the news that the U.S. economy grew more slowly than expected in the last three months, as well as the never ending concerns surrounding Greece. But I think it was the downgrade of nearly three dozen Italian banks that really caused the "slight pause" in the market, as investors started to appreciate the potential magnitude of this event. This is even though it seemed earlier in the week that progress was being made toward an agreement.

As disappointing as all of this seems, along with the fact that U.S. seems to lack some autonomy of its own, I think investors should take solace and continue to feel optimism in the fact that our economy continues to grow and our equity markets are very much alive. The good news is also that the Fed got in on the action and assured investors that short term interest rates will be kept as close to zero as possible at least until the end of 2014. This may or may not be enough to sustain the current momentum, but it certainly can't hurt.

As disappointing as it is to see the indices down on Friday, it is not a surprise, as I think profit taking at this juncture is indeed the right thing to do, considering that the S&P500 is up 7 percent for the year. So a pullback has to be just around the corner. I'm sure that I am not the first to say this, but the market does indeed appear overbought, and there are several candidates showing such signs that have made some headlines this week - particularly in the utilities sector.

Which stocks looks good which ones don't

We have approached one of the sectors that by and large have not fared particularly well in the market so far this year relative to the others. So it is hard to say with any degree of certainty whether or not this is a good sign, bad sign or merely "table-setting" for what lies ahead. But I suspect for one reason or another, investors have decided to take money out of utilities and placed into those that are riskier yet more profitable.

However, despite the lagging performance of the sector, there are several stocks that have posted significant gains early on in the year. For investors, it would be wise to lock in these gains now if the likelihood exists that market sentiment has indeed begun rotating out. For example, in the water utilities there are names such as Connecticut Water Service (NASDAQ:CTWS) that has gained 15 percent on the year thus far. It pays a decent dividend at 3%, which makes it pretty safe; however, it will likely be weighed down if the entire sector makes a turn for the worse. The stock currently trades at $31.21 and is only 5 percent away from its 52-week high. Now may be a time to lock in some gains.

Another name that I have been looking at within gas is Clean Energy Fuels Corp. (NASDAQ:CLNE) - for similar reasons to Connecticut Water. The stock has surged on the year with a gain of 30 percent and it is at the cusp of its 52-week high. The balance sheet on this company is not great, but it is improving. According to its website:

The leading provider of natural gas fuel for transportation in North America, Clean Energy is the smart decision for vehicle fleets demanding the most reliable connection to CNG and LNG. With an integrated offering of best-in-market services, we have the flexibility to adapt to your specific fueling needs - from constructing, equipping and maintaining fueling stations to converting vehicles to securing the financing.

There is quite a bit to like here. However, I think for investors it would be more prudent to like and realize a 30 percent YTD gain and wait for the pullback.

Stocks to consider

We are going to reverse course a little bit and discuss stocks within the sector that have not fared as well and yet may see some increase buying since they may have likely hit their bottom.

CenterPoint Energy (NYSE:CNP) has seen better days. It appears that the stock has not seen any green arrows at any point during the year though the broader market has produced nothing but gains. There is reason to suspect that this trend may change as the stock has climbed 4 percent since reaching a recent low of $18.07 at the end of January. While posting solid earnings relative to its peers, the stock also offers a handsome dividend at 4.3 percent yield.

FirstEnergy Corporation (NYSE:FE) also deserves some consideration. Aside from the fact that it has traded relatively flat for the past several months, it offers an excellent dividend at 5.1% yield. With a P/E of 17 it might be considered relatively expensive, however, the stock is right at its 50-day moving average and has shown to be pretty resilient of late. Relative to its peers, its underlying fundamentals presents a great opportunity for value investors willing to be patient.

Inergy, L.P. (NRGY) is one stock in this sector that didn't even benefit from the strength this sector had last year. It has been steadily grinding lower since topping out early in 2011 and it has been following a steady pattern of establishing a resistance level before ultimately breaking down. After holding near $24 for two months, it is now starting to set new lows, again continuing the trend.

Public Service Enterprise Group (NYSE:PEG) is another utility experiencing similar movement as those mentioned above. The company recently fell under some important points of resistance at $31 after having traded flat for a considerable amount of time. But its stock has been slowly building a base that suggests that the stock may begin to move upward. As with the other firms above, PEG pays a respectable dividend of 4.5% and trades at a decent P/E of 10. The stock does present some value at $30, but investors should be patient and realize that it may take the rest of the year for it to regain its previous high of $35.

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