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  1. Home
  2. / Investing
  3. / Utilities

Don't Write Off Regulated Industries

Utilities, for one, is offering up some solid investments -- including these three in particular.
By JOHN REESE
Mar 06, 2012 | 09:30 AM EST
Stocks quotes in this article: NU, CMS, XEL

We live in a time when the thought of government regulation of business is anathema to many. But, while regulation has its negatives, it can also be beneficial to at least some industries.

Let's take the airline industry as an example. Between 2001 and 2003, it lost more than $23 billion, more than its "total earnings of the past," according to a study by Massachusetts Institute of Technology. "By contrast," says the study, "the industry was profitable most of the time before deregulation [in 1978] even in down cycles."

I don't mention this to promote regulation but, rather, to note that regulated industries can indeed be profitable and good investments. Few regulated industries remain these days, but regulated utilities a notable example -- and, as it happens, a few regulated utilities look like good investment prospects at this time. I base this on the high ratings they have earned from the automated strategies I created from the writings of Wall Street gurus. Below are the three utilities that currently look appetizing.

Northeast Utilities System (NU) provides regulated electric and natural gas services to customers in Connecticut, Massachusetts and New Hampshire, and operates New England's largest energy delivery system with more than two million customers. The company gets high marks from the strategy I base on James P. O'Shaughnessy's investment thinking.

This screen requires a company have market capitalization in excess of $150 million, a hurdle Northeast easily surmounts with its $6.4 billion market cap. Earnings per share must have increased in each of the last five years, which also holds true for Northeast, and the company's price-to-sales ratio has to be south of 1.5. Northeast's is 1.43.

Lastly, the company must rank among the top 50 companies, based on those who pass the above three tests, as well as in view of the stock's relative strength -- a measure of how well a stock has performed relative to the rest of the market for the past year. Northeast's 71 relative strength reading puts it in that top 50.

CMS Energy (CMS) is an electric and gas utility that serves about 6.5 million of Michigan's 10 million residents, and it has a subsidiary engaged in independent power generation in several states. My Peter Lynch strategy currently recommends this stock. The most significant variable considered by this strategy is the P/E/G ratio, which is the price-to-earnings ratio relative to earnings -- a measure of the cost of growth to the investor. The maximum P/E/G allowed is 1.0, and CMS's yield-adjusted reading is a solid 0.71, well below the maximum.The company is also doing a good job managing inventories and has positive earnings per share -- both variables that this strategy factors in.

Xcel Energy (XEL) owns four utilities, with a total of 3.4 million electric customers and 1.9 million natural gas customers in eight states. Much like Northeast, Xcel is a favorite of the O'Shaughnessy-based strategy. It has a market cap of almost $13 billion, five years worth of EPS increases and a price-to-sales ratio of 1.20. Finally, it makes it into the top 50 with relative strength of 76.

in the past ye
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At the time of publication, Reese and his clients were long NU and XEL.

TAGS: Investing | U.S. Equity | Utilities

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