Utility companies may seem like shabby wallflowers, but they can still be worth taking to the dance. No one may ohhh and ahhh at them and congratulate you and your hot date, but they can be fun to be with. On Jan. 12, Standard & Poor's issued a report stating: "We expect utilities to benefit from rate increases and a continuing recovery in industrial sales."
If "stable" and "moderate growth potential" are words you find appealing, consider investing in Atmos Energy (ATO), the country's largest natural gas distribution utility. Atmos is strongly recommended using a strategy based on the advice of James P. O'Shaughnessy, a noted investment strategist and fund manager who has written about how he looks for stocks.
I took his advice and computerized it in a way that allows me to analyze stocks like he does. My O'Shaughnessy-based strategy likes Atmos Energy's market cap of nearly $6 billion, earnings per share that have increased in each of the past five fiscal years, and a price-to-sales ratio of 1.2 (this is a way of judging how well priced a stock is, and the maximum allowed is 1.5). The strategy takes all the stocks that pass these criteria and picks the top 50 based on their relative strength, which is a measure of how well a stock has performed in the past 12 months versus the entire market. With a 79 relative strength, Atmos is in this top-50 grouping.
Chesapeake Utilities (CPK) is also worth considering. This company's businesses include natural gas distribution and transmission operations on the Delmarva Peninsula along the Chesapeake Bay and in Florida, and electric distribution in Florida, as well as propane distribution operations. Like Atmos, Chesapeake Utilities is an O'Shaughnessy favorite, with a market cap of $740 million, EPS growth in each of the past five years, a P/S sales ratio of 1.48 (just below the maximum) and a relative strength of 81.
One more utility worth considering is New Jersey Resources (NJR), a regulated gas utility. Among the strategies I computerized is the one outlined by Peter Lynch, the great mutual fund manager. The strategy I based on his writings likes New Jersey Resources. This strategy emphasizes the P/E/G ratio (price-to-earnings relative to growth), which measures how much the investor is paying for growth. A P/E/G of up to 1.0 is acceptable; New Jersey Resources' yield-adjusted P/E/G makes the grade at 0.95.