Gassed Up

8/14/2017


We don't give much thought to the broad market's sector weightings when we select stocks for our recommended lists. If we find a lot of technology and industrial stocks that deliver the mix of growth and value we seek, we'll tend to have healthy exposures to those sectors.

Nor do we worry too much about industry exposure within sectors. No portfolio demonstrates that fact better than our Top 15 Utilities, an equal-weighted collection of stocks designed to provide a yield in line with the sector average, coupled with superior growth potential. Our Top 15 portfolio has 33% in electric utilities, 33% in diversified utilities, and 27% in natural-gas utilities, rounding out with a pipeline operator.


HITTING THE GAS

Our Top 15 Utilities portfolio has 27% in gas utilities, more than four times the industry's weighting within the S&P 1500 utility sector. In contrast, our weighting of 33% in electric utilities is below the industry's 59%. We recommend no power or water stocks at the moment.

12-Mo.
Profit
Growth
(%)
----------- Quadrix Scores -----------
Company (Price; Ticker)
Div.
Yield
(%)
Trailing
P/E Ratio
Value
Overall
12-
Factor
Sector
Reranked
Overall
Industry
Atmos Energy
($87; ATO)
2.1
9
24
36
55
63
42
Gas
CMS Energy
($47; CMS)
2.8
4
23
53
61
67
64
Diversified
DTE Energy
($109; DTE)
3.0
28
19
62
76
51
94
Diversified
Edison Int'l
($79; EIX)
2.7
61
19
64
62
39
70
Electric
EQT Midstream
($73; EQM)
5.1
3
14
86
95
52
100
Services
Eversource ($62; ES)
3.1
12
20
61
56
70
63
Electric
Great Plains Energy
($31; GXP)
3.5
20
17
63
52
100
76
Electric
NextEra Energy
($147; NEE)
2.7
34
22
52
78
87
96
Electric
NiSource ($26; NI)
2.7
24
22
64
65
88
97
Gas
Portland General
($46; POR)
3.0
8
21
64
60
81
75
Electric
Star Gas Partners
($11; SGU)
4.1
(53)
30
50
52
75
36
Gas
UGI ($48; UGI)
2.1
2
21
65
65
96
81
Gas
Unitil ($50; UTL)
2.9
19
24
46
31
57
13
Diversified
Vectren ($61; VVC)
2.8
21
23
48
58
73
57
Diversified
WEC Energy Group
($64; WEC)
3.2
6
21
58
60
55
67
Diversified
Top 15 average
3.0
13
21
58
62
70
69
Utility sector
average
3.0
12
21
54
53
55
56

In contrast, the S&P 1500 Index's utility sector consists of 59% electric utilities and 31% diversified as measured by stock-market value. Gas, power, and water utilities combine to make up barely over 10% of the sector's stock-market value.

Our quest for utilities with growth potential tends to favor the gas group, which over the last year has averaged higher sales and profit growth than other utility industries.

Natural gas as an industry is pricier than the sector as a whole, both on an absolute basis and relative to its own history. But, as always, we aren't buying the whole sector. Our list features four gas utilities. One trades at a discount to its historical norm, three trade at a discount to the industry average, and three generate enough growth to warrant premium valuations.

Does this mean we dislike electric utilities? Not at all. They still make up a large portion of the Top 15 Utilities portfolio, even if our weighting is below that of the index. They average Quadrix Overall scores of 55, two points above the sector average, with profit growth roughly matching the average and cheaper valuations.

We haven't made a point of excluding electric utilities — or water and power utilities, for that matter. We just haven't found as many names we like in those sectors in recent months. We may not be similarly gas-heavy at this time next year.

Our approach has paid off, as the chart below illustrates. Since its inception at the start of 2007, the Top 15 Utilities portfolio has returned 240.6% including dividends, versus 128.8% for the S&P 1500 Utility Sector Index. This week, we're making two changes to the Top 15 Utilities. CMS Energy ($47; CMS) and WEC Energy Group ($64; WEC) will replace Entergy ($77; ETR) and Scana ($63; SCG).


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