Turnaround Expert Eyes Utilities

06/13/2014 10:00 am EST

Focus: UTILITIES

George Putnam

Editor, The Turnaround Letter

George Putnam, editor of The Turnaround Letter, highlights a trio of utility stocks that have underperformed the broad market over the past year, but may be poised to "light up" investor portfolios.

Steven Halpern: Joining us today is turnaround expert, George Putnam, editor of the industry-leading The Turnaround Letter. How are you doing today, George?

George Putnam: Fine, thanks, Steve.

Steven Halpern: Well, thank you for joining us. Utility stocks have significantly led the market over the last year or so; what do you believe accounts for that sharp underperformance?

George Putnam: I think they're perceived as being somewhat stodgy, which means that in periods where the market is really strong, as it has been much of the last year, investors tend to ignore this sector.

Also, it gets a little bit of bad press on the environmental front and I think those two things were probably the major factors.

Steven Halpern: You note in your latest research report that utilities might be as sexy as tech stocks, but nevertheless, the sector does have its attractions; could you expand on that?

George Putnam: Sure; well, they tend to be very steady earners. People always need to use electricity, and they pay fairly high dividends, so if the market is going to be volatile, that can be valuable to you.

Steven Halpern: Now, would you expect that, if there is a market correction, that these might not have as great a downside risk as well?

George Putnam: Yes, I think that's true; and then the third factor, actually, is we've begun to see some consolidation in the sector, or mergers, and so that can boost prices too.

Steven Halpern: Okay, so let's take a look at a couple of individual utility stocks; and one you like is TECO Energy (TE), which is a Tampa, Florida utility; could you tell us a little more about that?

George Putnam: Sure, I think that the area that it focuses on, the west part of Florida, is a strong area, growing population; so they should have solid earnings going forward.

They do own some coal mining facilities, which have hurt them, but I suspect that that sector is probably nearing the bottom. They're fairly small in terms of the market cap; so, if another utility was on the prowl, they could be a candidate for a take-over.

Steven Halpern: Now, another company that you recommend is Portland General Electric Co. (POR) which, you know, provides electric service to over 40% of Oregon. Could you tell us what you like about Portland General?

George Putnam: Sure; well, Portland has been interesting for a long time because it was owned at one point by Enron and it got kind of dragged down in that whole mess and then it got spun out of the Enron bankruptcy, but it's a good solid utility.

And it has some appeal in that it's one of the greener utilities; they get a fair amount of their power from hydro and from wind; so I think that's one thing that makes it interesting. Again, as a smaller utility, it might get bought by somebody else.

Steven Halpern: Now a third utility that you highlight is FirstEnergy (FE), which operates in a larger area, stretching from Ohio and Pennsylvania across New Jersey, and New York, and even Maryland, and West Virginia. What do you like about the prospects there?

George Putnam: While this sector has begun to move up in price earlier this year, FirstEnergy really hasn't and it's been sort of refocusing some of its business.

They cut the dividend to raise some money to acquire some new assets and I think that scared people a little bit, but it still has a healthy dividend.

Again, its area that it serves is reasonably strong, and if they get a little bit of improvement in their rates, I think that the stock could do very well. It also has a fairly healthy dividend.

Steven Halpern: Well, we really appreciate you taking the time today. Thank you for joining us.

George Putnam: You're very welcome; thank you.

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