Charge Up Your Portfolio

01/20/2006 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

As editor of The Utility Forecaster, it should be no surprise that Roger Conrad has developed the leading reputation on assessing utility stocksranging from traditional utes to other sectors such as telecom and water. Here he charges up a pair of favorites for the year ahead.

"Multi-state electric and gas utility Aquila (ILA NYSE) is my top pick for more aggressive investors. Time and again, battered regulated utilities have proven their ability to recover from the brink of doom, generating huge profits for those who bought when prospects looked bleakest. Aquila should be a poster child for that rule in 2006. The company has now shed virtually all of the cash-draining merchant power assets that once threatened to shove it into Chapter 11. It’s now in the process of selling several utility franchises (at prices above expectations), for the purpose of reducing its hefty debt load.

"When it completes these transactions this summer, the company’s long-suffering credit rating will get a boost from all three major raters. At that point, all management will have to do is continue to build rate base through planned construction projects and related rate increases, and watch cash flows rise. Even in a best case, the company is probably a couple of years from paying a dividend. But when it does, the shares will almost surely be trading at 10 or higher. That’s a mighty gain from current levels. Aquila is not for the risk averse, but it’s a solid speculation for everyone else up to 5.

"For my more conservative play for 2006, I recommend a master limited partnership. These investment vehicles have tumbled in the past few months, mostly due to fear of volatile interest rates and a recommendation by the president’s tax panel to eliminate their tax advantages. Enterprise Products Partners (EPD NYSE) has been no exception. But the LP’s results have gone in precisely the opposite direction, as its portfolio of energy pipeline, processing and storage assets—which includes vital links to rapidly growing deepwater Gulf of Mexico production—has continued to perform well.

"Distributable cash flow nearly tripled over the past year, fueling a steady 8.9% boost in the dividend. And at 1.2-to-1, coverage is adequate to finance further hikes, even leaving out expected growth. Now yielding over 7% and on track for strong, long-term growth, Enterprise is a solid buy for income and some growth up to 28. The stock is out top income pick for the coming year?"

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