All Charged Up About Utilities

 | Jun 27, 2013 | 6:00 PM EDT  | Comments
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As they say in sports, the best offense is a good defense. With this gyrating stock market, it is understandable if investors seek stability. Today, the classic non-turbulent, defensive investment is in utility stocks.

Years ago, "Ma Bell," the forerunner of telecom giant AT&T (T), was pegged (and often derided) as the classic stock for widows and orphans because its performance and dividends were so predictable.

But today's utility stocks, even with their ups and downs, are generally not as risky as the typical stock, and they provide decent yields (the current yield for the Dow Jones Utility Average is 4.04%).

To choose stocks, I rely on computerized guru-based strategies I created based on the writings of Wall Street's great investors. One of these is Peter Lynch, arguably the most renowned mutual fund manager of all time. His strategy is noted for the P/E/G ratio, which is price-to-earnings relative to growth. It measures how much the investor is paying for growth. A P/E/G of 1.0, for example, says the investor is paying $1 for every percentage point of growth. To earn the strategy's highest rating, the P/E/G must not exceed 1.0.

One utility the Lynch strategy identifies is Edison International (EIX), owner of Southern California Edison. It owned Edison Mission, a merchant power generator, but Edison Mission filed for bankruptcy protection in late 2012, leaving Edison International with only its SCE business, which serves 14 million people in Southern California, excluding the City of Los Angeles, which operates its own electric utility. The company's market area is vibrant and economically diversified. Because it's an electric utility, the company is regulated, which limits its ability to raise rates. Edison International's yield-adjusted P/E/G is a solid 0.73 (the investor is paying $0.73 for every percentage point of growth).

Another Lynch favorite is Integrys Energy Group (TEG). This is a more diversified company than Edison International, having regulated electric utility and natural gas operations, as well as other businesses. Its utility operations are in Illinois, Michigan, Minnesota and Wisconsin. The stock's yield is an excellent 4.7% (vs. 2.8% for Edison International). Integrys's yield-adjusted P/E/G is a desirable 0.57.

Westar Energy (WR) is Kansas's largest electric utility, serving 687,000 customers. It sports a strong yield of 4.2%. It has the highest P/E/G of the three utilities, at 0.97, just below the 1.0 maximum threshold.

All three stocks are solid performers with good yields. If you want to be defensive, consider these companies for your portfolio.

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