Our utilities set the pace

8/11/2008


Utility stocks have avoided the worst of the bloodletting over the last year, delivering decent results and fairly low volatility amid the market’s fall.

In the 12 months ended July, the S&P 1500 Utility Sector Index rose slightly, versus a 12% decline for the broader S&P 1500 Index. The Forecasts’ Top 15 Utilities portfolio outperformed the sector index during that 12-month period and has proved particularly defensive this year.

As of Aug. 5, the Top 15 Utilities portfolio had fallen just 6.8% in 2008, versus a 12.3% decline for the S&P 1500 Utilities Sector Index. Key to the outperformance of the Top 15 Utilities over the last year are strong gains from natural-gas utilities and utility/energy hybrids with both energy-production and utility operations.

Containing stocks from every major utility industry group other than the overpriced water utilities, the Top 15 portfolio is well-diversified within the utility sector. Assuming equal-dollar positions in each of the 15 stocks, the portfolio yields 3.8%, roughly in line with the sector index’s yield but offering superior capital-gains potential, in our opinion.

To maintain that superior potential, we are making some changes to the Top 15 Utilities portfolio.

We are dropping Northwest Natural Gas ($45; NYSE: NWN), PPL ($44; NYSE: PPL), and FirstEnergy ($68; NYSE: FE), all of which delivered positive returns over the last year but now look somewhat expensive. All three have seen substantial deterioration of their Quadrix® scores in recent months.

New additions to the Top 15 portfolio are:

American Electric Power ($40; NYSE: AEP), which serves 5.2 million customers in 11 states and trades at just 12 times trailing earnings.

Pepco Holdings ($69; NYSE: POM), an attractively valued, high-yielding electric utility serving Washington, D.C., and four Eastern states.

OGE Energy ($33; NYSE: OGE), the fast-growing owner of Oklahoma Gas and Electric and a pipeline company. superior capital-gains potential, in our opinion.


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