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SIVY ON STOCKS from money.com
May 18, 2001 *****************[ A D V E R T I S E M E N T ]**************** Jump-start a child's College Fund with MONEY's $5000 QUICK CASH Sweepstakes! It's easy - just click the link below for your chance to enter to win $5000 Cash! Plus while you're at money.com, jumpstart your investments with a FREE Trial issue of MONEY! Click Here: http://www.money.com/scholarship ************************************************************** Unrecognized power plays These five electric utilities are undervalued and under-appreciated by analysts. But they offer superior long-term returns. By Michael Sivy Given the recent turmoil in the stock market and uncertainty about the economy's prospects for the rest of the year, many investors have been diversifying their portfolios with income investments. In March, for instance, shareholders pulled a record amount of money out of equity mutual funds -- the last time stock funds saw comparable outflows was in the aftermath of the 1987 crash. Much of the money has gone into income investments, and especially bond funds. Funds that invest in Treasury bonds and other high-quality long-term issues are especially popular. Personally, though, I think there are better alternatives that offer higher yields, more flexibility and long-term growth potential. Preferred shares, for instance, can offer yields of more than 7 percent, compared with 5.8 percent for Treasuries. (For more information on these unique investments, see "Preferred shares: uncommon values"). [ http://www.money.com/money/depts/investing/sivy/archive/001020.html ] And they generally sell in round lots costing only about $2,500, versus at least $10,000 for most bonds. My top income choices, however, are utility stocks, and for one very simple reason: rising dividends. When you buy a bond or a preferred stock, you lock in a certain level of return. And since there is always some inflation, the real purchasing power of your income erodes over time. But most electric utilities offer long-term dividend growth. Even though utilities' earnings increases don't look like much compared with the growth rates of tech stocks, even 5 percent or 6 percent a year will keep you ahead of inflation -- and eventually outpace the return on bonds (see "Selecting stocks for income,"). [ http://www.money.com/money/depts/investing/sivy/archive/001016.html ] One of my top utility picks over the past year has been Duke Energy [DUK], an electric company based in the Carolinas. In addition to having a well-run local business, Duke has profited enormously because one of its subsidiaries provides power to the California market where electricity prices are soaring. As a result, the stock has gained 50 percent since I first recommended it last summer. I still think Duke has attractive long-term prospects, but obviously it's not as good a buy as it was a year ago. Where are today's best values in the electric utility sector? For the answer, I turned to the Leuthold Group, a value-oriented investment advisory firm in Minneapolis that regularly does a quantitative screen for stocks that are undervalued because they are out of favor. Of the 53 stocks the most recent screen identified, 10 are electric utilities. Of those, I've winnowed out five that have solid finances and offer projected earnings growth of 5 percent or more over the next five years. In addition, these electric companies have modest P/Es, based on this year's estimated results. The five include DTE Energy [DTE] at $43.40 a share. The parent company for Detroit Edison is in the process of acquiring MCN Energy, a Michigan gas company, which could boost the combined firms' long-term earnings growth. In the meantime, DTE pays a 4.8 percent yield and trades at a 12.2 P/E. FirstEnergy [FE], the holding company for Ohio Edison, is in the middle of a complicated attempt to acquire GPU, and uncertainty about the deal has depressed the stock. Whether it goes through or not, at $29.40 a share, FirstEnergy offers a 5.1 percent yield and a 10.4 P/E. OGE [OGE] Energy is the holding company for Oklahoma Gas & Electric. At $22.10, the stock offers a 6 percent yield and a 12.5 P/E. Pinnacle West Capital [PNW], parent of Arizona Public Service is expanding its generating capacity in the Southwest. At $49.50 a share, this growth-oriented utility pays a 3 percent yield and trades at a 13 P/E. Finally, Potomac Electric [POM] supplies power to Washington D.C. and the surrounding area. The company is acquiring the Delaware utility Connectiv, in a move that should enhance long-term returns. At $22.40 a share, Potomac Electric carries a 4.4 percent yield and a 12 P/E and should grow as long as Washington keeps expanding. ### Post your comments on Michael's column at: http://www.money.com/depts/investing/sivy/index.html To subscribe or unsubscribe to Sivy on Stocks, go to: http://www.money.com/email/ ----------------------------------------------------------- CONTACT THE BIGGEST COMPANIES IN THE WORLD! Over 5,000 contact names in the OFFICIAL FORTUNE Databases. DOWNLOAD THEM NOW! http://www.fortune.com/sitelets/datastore/index.html?mn01 ----------------------------------------------------------- * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Special Internet Offer!!! 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