No Lost Decade for These Stocks

04/22/2011 10:38 am EST

Focus: STOCKS

Roger Conrad

Founder and Chief Editor, Capitalist Times

Can you guess which ones? Since we’re talking to Roger Conrad, editor of Utility Forecaster, you’ve probably guessed it. But it’s true that many utilities have rebuilt their reputations...and balance sheets...by focusing on their core business.

Now everybody’s going to see you and they’re going to know right away which ones we’re talking about, right?

Absolutely. Well, they should.

They are utilities, which began the last ten years—and this actually very much surprised me to find this out—but utilities began the last decade really in one of the worst ways you possibly could. They were at multi-year highs on the averages. Immediately, we swung into the California power crisis, and there were some bankruptcies out there.

Enron.

Later in the year, we had Enron. And then, of course, we had by the late part of 2002 more than two dozen companies on the verge of bankruptcy, or in bankruptcy. It was a disaster.

A lot of companies got overleveraged. They took on too much risk. They got involved in businesses they really didn’t have any business getting involved in, and it all came crashing down all at once.

It wasn’t nearly as severe a recession as in 2008 and 2009—but the irony is, we came around to 2008 and 2009, and utilities, although they fell with the rest of the market, really held together throughout that credit crunch.

There really were no major refinancing problems. No dividend cuts, either. Maybe one or two out of 50 different companies we cover in Utility Forecaster. So it was really a nice performance, and of course in 2009 and 2010, they performed fairly well.

The real story for utilities the last ten years was a great de-leveraging—they cut risks, they cut debt, and they repaired relations with the regulators. They got back to running their core businesses, and the result is today you have companies that are in better financial shape than ever.

Dividends are well covered, and they’re well covered with earnings that are recession resistant, with very good revenue security, so....

But they haven’t. I mean, obviously in the early stages of the bull market, they haven’t really kept up with the financials, the consumer discretionaries, or technology stocks—things like that—but is the Dow Jones Utility Average near its highs?

It’s actually not. It’s about 25% off, and part of that is because some of the stocks they have in there are involved in the wholesale power market. Companies like Exelon, Entergy, and First Energy—and the wholesale electricity market has been hurt by the recession, by weakness in natural-gas prices, which continues to this day.

People are looking two or three years down the road and saying, “What happens if prices remain as weak as they are now when these companies’ contracts come due, when their hedges come off, and so forth?” And earnings are going to take a hit there. So, they’re already being priced for that at this point, and again they have lagged.

Utilities have generally lagged the rest of the market. There are some that have done actually pretty well—the ones that are outside of the wholesale power market, companies like Southern Company (SO), have done well.

But, you’re absolutely right. They have been laggards, but that’s not really unusual.

It may not necessarily be a bad thing at this stage, for people looking for value. Can you name one stock very quickly? One of the utilities that you think people should take a look at right now.

Well, I think Southern Company has definitely proven itself over the years. It’s very simple. It’s in the South.

There’s lots of capital spending and good regulation, so very likely getting a good rate of return on that, which means higher cash flows, higher dividends, and eventually a higher share price.

Do you own it, either personally or professionally?

I do own Southern Company. Again, I have for many years.

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