Try Our Top Utilities

6/28/2010


Our utility strategy is working.

We don’t recommend many utilities as Buys or Long-Term Buys, in large part because few offer the overall fundamental strength and profit-growth potential we seek. Instead, we prefer to find safety in numbers, using our Top 15 Utilities portfolio to generate a yield comparable to the average utility while offering substantially better growth potential.

Our growth-and-income approach has paid off. The Top 15 Utilities portfolio has returned 6.0% since its inception in 2007, versus a negative return of 7.3% for its benchmark, the S&P 1500 Utility Sector Index. The Top 15 portfolio also beat the broader S&P 1500 Index and the average utility stock mutual fund.

Rather than purchasing just two or three utilities, we advise readers to consider our Top 15 Utilities portfolio. Here are three of the most common questions we get regarding the portfolio, and their answers.

Q I don’t have $100,000 to invest in utilities. Do you expect me to put just a few thousand dollars into each stock?
A Why not? The Forecasts has long advocated dollar-based investing, or the practice of purchasing stocks by dollar amount rather than by share count. While at one time it was cheaper to purchase stocks in lots of 100 shares, those days are gone. If you want to invest $30,000 in our Top 15 Utilities portfolio, purchase about $2,000 of each stock. In the table above, we break down the share counts and dollar amounts needed.

To determine positions for your own portfolio, start by dividing the amount of money you wish to invest by 15. Then divide that amount by the price of each stock to determine how many shares to purchase.

Q How long do I hold the stocks?
A Our goal is to limit the portfolio to our top 15 picks for 18- to 24-month returns. On average, we have held stocks for 15 months. We write about utilities twice a quarter, and we review the portfolio holdings frequently. When we make changes to the portfolio, we will announce them in the newsletter.

Q Won’t the transaction costs eat up all my profits?
A Not if you’re wise with your rebalancing. The Top 15 Utilities portfolio doesn’t have a huge amount of turnover. We replaced six stocks in 2007, eight in both 2008 and 2009, and five so far this year. Investors who put $30,000 into our strategy, bought and sold based on our advice, and were judicious in their rebalancing should have solidly outperformed our benchmark.

Accommodating our rank changes would have required 54 trades during the three-a-half-year period. Let’s assume that rather than rebalance every position every time we made a change, an investor made another 54 trades to rebalance the portfolio, periodically adding to the smallest positions or selling off parts of the largest positions. At $10 per trade, the 108 trades would have reduced returns by an annualized 1.0%. To put that cost into perspective, consider three facts.

First, our Top 15 Utilities portfolio has outperformed the S&P 1500 Utility Sector Index by 13 percentage points since its inception, more than enough to cover the transaction costs.

Second, utility stock mutual funds performed even worse than the utility sector index. The average utility fund has delivered a negative return of 10.2% since 2003.

Third, if you have more money to invest, the effect of transaction costs on returns declines.

Rank changes

This week, we are making a change to the Top 15 Utilities portfolio. Cleco ($26; CNL) will replace Sempra Energy ($48; SRE).

Based in central Louisiana, Cleco is an electric utility with a small wholesale power business. A new 600-megawatt generating plant came online this spring, allowing Cleco to better control its costs by limiting the need to purchase power. In the wake of a challenging 2009, Cleco reported strong earnings and sales growth in the March quarter. Management showed some confidence by raising the quarterly dividend for the first time since 2002. Cleco now yields 3.8% and pays out 48% of its earnings in dividends. Cleco set a target payout ratio of 50% to 60%, suggesting more dividend hikes are likely. The stock earns a Quadrix® Value score of 84 and an Overall score of 81. Cleco, reasonably valued at 13 times trailing earnings, earns an A ranking in our Utility Update.

Sempra suffers from weak operating momentum, declining earnings estimates, and poor share-price action. The diversified utility is shopping its North American commodities business, which could smooth out operating results in coming quarters. Nevertheless, Sempra’s Quadrix scores are deteriorating, and the stock should be sold. Sempra’s ranking in the Utility Update falls to B.

Top 15 stock review

Energen ($47; EGN) derives 43% of its revenue from a natural-gas utility in Alabama. It also produces natural gas and oil. In April, Energen raised its 2010 per-share-earnings guidance by a dime to $4.30 to $4.70, implying at least 22% growth. As measured by Quadrix, Energen is one of the most attractive utilities. The stock earns a 99 in the 12-Factor Sector and Reranked Overall scores, which are designed to compare utilities to other utilities. Energen, with a Quadrix Overall score of 82, the second-highest in the sector, is a Long-Term Buy.


FPL Group has changed its name to NextEra Energy ($51; NEE) and dropped its former FPL ticker symbol. The stock looks attractive by any name. It boasts a solid 3.9% yield, and profits are expected to advance 7% on 5% higher revenue this year. In addition to its electric utility (73% of revenue), NextEra operates a power-generation business (26%). NextEra is the largest U.S. generator of wind and solar power, and more than 90% of the company’s generation comes from clean or renewable fuels. NextEra earns an A ranking in the Utility Update.

TOP 15 UTILITIES PORTFOLIO
Est. EPS
—– Growth —–
5- Year Change
—– (Annual.) —–
Quadrix Sector
—–— Scores * —–—
Strategy For $30,000
——— Portfolio ———
Company (Price; Yield)
Div.
($)
Yield
(%)
Payout
Ratio †
(%)
Curr.
Year
(%)
Next
Year
(%)
Per-Share
Profits
(%)
Div.
(%)
Quadrix
Overall
Score *
12-
Factor
Sector
Reranked
Overall
No. of
Shares
Value of
Investment
($)
AGL Resources
($37; AGL)
1.76
4.70
57
5
4
5
8
60
52
59
54
2,004
Avista ($20; AVA)
1.00
5.00
65
(1)
17
15
11
58
57
57
101
2,004
Cleco ($26; CNL)
1.00
3.80
48
23
3
13
0
81
84
93
76
1,996
DPL ($25; DPL)
1.21
4.80
61
20
6
16
4
68
82
67
80
2,006
DTE Energy
($47; DTE)
2.12
4.50
59
8
4
10
1
73
53
92
43
2,021
Energen ($47; EGN)
0.52
1.10
14
27
(15)
17
6
82
99
99
42
1,987
Entergy ($75; ETR)
3.32
4.40
49
0
4
11
9
67
90
72
27
2,018
Exelon ($40; EXC)
2.10
5.30
54
(8)
8
8
9
67
94
66
50
1,988
IDACORP ($34; IDA)
1.20
3.60
47
3
6
6
0
70
80
88
59
1,993
NextEra ($51; NEE)
2.00
3.90
49
7
4
12
7
70
92
77
39
1,978
OGE Energy
($37; OGE)
1.45
3.90
51
11
5
13
1
70
39
82
54
1,993
Oneok ($45; OKE)
1.76
3.90
56
6
6
9
12
73
54
83
44
2,001
Public Svc. Enterprise  ($32; PEG)
1.37
4.30
46
0
(4)
17
4
80
93
96
62
1,996
UGI ($27; UGI)
1.00
3.70
43
(3)
4
6
5
63
61
71
75
2,005
Unisource Energy
($31; UNS)
1.56
5.10
53
14
(4)
18
13
78
77
90
65
1,998
Top 15 Portfolio Average
4.10
50
8
3
12
6
70
74
80
Average S&P 1500 Utility Stock
4.60
64
3
7
5
4
58
54
55
* Quadrix scores are percentile ranks, with 100 the best. The sector scores are designed to rank utilities versus other utilities, while the Overall score ranks them relative to all of the companies in our research universe of more than 4,000 stocks.      † Dividend as a percentage of trailing 12-month earnings.

 


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com