The Right Tools For The Job


Utilities aren't like other stocks.

We're not talking about their yields, though they do tend to pay higher dividends than stocks in other sectors, but rather the fact that investors judge these companies by different criteria.

Growth: Investors understand that utilities often generate little operating momentum and are impacted by weather fluctuations, and as such may not punish the companies as much for weak results.

Value: Utilities as a group tend to trade at lower valuations than other stocks. Utilities in the S&P 1500 Index average Quadrix Value scores of 61, third-highest among the 11 sectors. Only consumer-discretionary stocks and financials look cheaper.

Yield: Many utility investors fixate on yield, purchasing these stocks more for their income than anything else. We address the danger of a yield-first approach in the story starting on page 1, and we recommend a different strategy — diversification.

Our traditional quantitative stock-analysis tools don't work especially well for utilities. In rolling 12-month periods since 1994, the top one-fifth of S&P 1500 utilities as measured by Overall score outperformed the average utility by an average of 0.4%. OK, but not great. With that in mind, we consider utility stocks differently from our traditional strategy in two ways:

Special scores

While we now offer sector-specific scores ( for all 11 sectors, we started the sector scores with utilities because the traditional Overall score was never that effective for them. We provide two sector scores, the 12-Factor (a dozen statistics that work especially well for utilities) and Reranked Overall (the same six categories used for the regular Overall score, but weighted to favor those that work well in a given sector).

As the chart above shows, top Reranked Overall scorers returned an average of 14.5%. Top 12-Factor scorers managed 13.5% returns, below those of the traditional Overall score but with less volatility.

Safety in numbers

At the moment, our buy lists contain no utility stocks. That's often the case. However, for investors seeking utility exposure we offer the Top 15 Utilities portfolio, which contains a diversified mix of utilities, as well as a couple of companies that operate pipelines.

Since its inception in 2007, our Top 15 Utilities portfolio ( has delivered a total return (including dividends) of 223%, more than twice the S&P 1500 Utility Sector Index's 107%. Along the way, our utilities beat the index in eight of the 10 years. We are about even so far this year.

If you want to invest in utilities, we advise the following:

1) Don't put more than 10% or 15% of your portfolio in utilities, which account for 3% of the index's stock-market value.

2) Buy equal-weighted positions in all 15 stocks, rather than trying to select just one or two.

The Top 15 Utilities portfolio is designed to pay a yield comparable to that of the average utility, with substantially higher capital-gains potential. Over the last decade, we've more than achieved that goal.

This week we made a change to the Top 15 Utilities — Avista ($39; AVA) is out, and Great Plains Energy ($27; GXP) is in.

You'll find the Top 15 Utilities portfolio on the last page of our monthly Monitored List section. You can visit the portfolio online any time at

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