Tag Archives: nasdaq

Which Other Utilities Are In The Same Class As Southern Company?

A few days ago, I wrote an article on the reasons why I am still buying utility Southern Company (NYSE: SO ) and received an interesting comment. A reader asked what other utilities have the same quality attributes as SO: “Which other utilities are in the class of SO?” The most comprehensive answers is: It all depends. It depends on what criteria is being used to classify SO. Is it by S&P Quality Rating for 10-yr consistency in earnings and dividend growth? Is it by level of credit support offer by the governmental regulatory bodies? Is it by earnings yield, dividend yield, PEG ratio, ROIC, or some other fundamental comparison? Is it a combination of all the above? The criteria used should depend on the risk portfolio of the individual investor and on his/her goals and specific strategies to reach those goals. Let’s begin with arguably the easiest to research: S&P Equity Quality Rank. The Quality Rank groups companies based on their 10-yr consistency in earnings and dividend growth, with A+ being the highest and B+ considered average. Out of the 2,802 companies with equity ratings, only 2% fall into the top category and 10% are considered above average at A- and higher. A+ Highest 2.2%; 38 companies A High 2.9 %; 84 A- Above Avg. 5.6%; 159 B+ Average 16.8%; 473 B Below Avg 22.1%; 621 B- Lower 26.9%; 755 C Lowest 23.9%; 669 Most utilities are rated by S&P Capital IQ and their reports are readily available from most brokerage accounts. For example, I have access to a fidelity.com brokerage account offering a stock screener including the Quality Rankings as an option. Of the 137 utilities identified by S&P, 78 have an Equity Ranking; 3 are rated A+, 8 are rated A, and 19 are rated A-, with 48 rated B+ and lower. One of the criteria for a Ranking is a 10-yr trading history, and some utilities have recently restructured and have not achieved this minimum review period. Southern Company is rated A-. Below is a listing of utilities whose Quality Ranking is A- or higher: Sources: fidelity.com, S&P Capital IQ. Another criteria could be Return on Invested Capital. ROIC is a tool used for comparing management effectiveness. While many will look at return on equity or return on assets, ROIC is a more encompassing matrix as it calculates shareholder returns generated by management utilizing all the capital at its disposal – debt and equity. Using the 30 companies above, comparison of 3-yr average ROIC would look like the table below. However, ROIC is only half the equation as it is best to also calculate the weighted average cost of capital WACC to determine the net return, also know as the “hurdle rate”. While American Water Works (NYSE: AWR ) has the largest 3-yr average ROIC at 9.0% and Entergy (NYSE: ETR ) with the lowest at 5.1%, after deducting their WACC, AWR has a Net ROIC of 1.1% and ETR has a -0.2%. Of the above list, the best Net ROIC is generated by small-cap water utilities Artesian Resources (NASDAQ: ARTNA ) and Connecticut Water Service (NASDAQ: CTWS ) at 3.4% and 3.2% respectively. Southern Company at 2.2% outperforms most of its Electric and Multi-utility rivals except WEC Energy (NYSE: WEC ) and SCANA Corp (NYSE: SCG ). Sources: Guiding Mast Investments, Morningstar.com, thatswacc.com. It is important to note the average ROIC for the utility sector is between 4.0% and 4.5%, demonstrating the quality of the above list. Managers at the above listed companies outperformed the sector 3-year average on ROIC by between 20% and 100%. Another method to review utilities is by the regulatory environment in which they operate. Even as an inexact science, the relationship between a utility and the regulatory body controlling its profitability is an important consideration. As the regulatory environment is essential to developing credit ratings for utilities, S&P Credit has a three-level assessment of the regulatory environment by state. Published in 2014, the latest US Utility Regulatory Assessment rates the following states as being “Strong”, compared to “Strong/Adequate”, and “Adequate”: FERC, Wisconsin, Michigan, Iowa, Kentucky, Alabama, Florida, South Carolina, North Carolina, , and Colorado. Only Mississippi and Hawaii were listed as “Adequate” with the balance of the states falling in the middle. S&P believes these nine states and the Federal Energy Regulatory Commission offer improved support for the utilities under their jurisdiction. ITC Holdings (NYSE: ITC ), NextEra (NYSE: NEE ), WEC Energy , MGE Energy (NASDAQ: MGEE ), and SCANA have some of the same positive regulatory environments as Southern Company. Some investors are focused on the income attributes of utility stocks, and the current yield is an important consideration. Various industries within the sector usually offer comparable yields, with Electric utilities historically paying a higher yield and Water utilities offering a bit lighter income. On this basis, the top yielding stocks by industry are Entergy and Southern Company, South Jersey Industries (NYSE: SJI ) and Southwest Gas (NYSE: SWX ) (GAS is being purchased by SO), Avista (NYSE: AVA ) and SCANA , along with Artesian Resources and Middlesex Water (NASDAQ: MSEX ). The table below lists the recent yield by company as offered on Morningstar.com Source: Guiding Mast Investments, Morningstar.com, thatswacc.com. Some investors are looking for stocks that are undervalued, and many investors have their own definition of “undervalued”. One possible criterion could be the difference between the current PE ratio vs it historic PE ratio. Fastgraph.com offers their well-known above/below blue line visualization of this trend, with a black line representing current and a blue line representing a historic PE. The table below lists these stocks and their current relationship to historic PE ratios. For example, ITC is currently trading at a PE ratio of 18.8 when its historic PE is closer to 22.6, for a difference of -3.8. On the other end of the spectrum, the buyout is causing Piedmont Natural Gas (NYSE: PNY ) to trade at a PE of 30.6 vs historic levels of 18.2 for a difference of +12.4. Southern Company is currently trading at its long-term historic PE valuation, and those stocks listed above it in the table has similar, or better, attributes. While it is difficult to answer the original question of other utilities in the same “class” as Southern Company, the five attributes above should allow utility investors to begin their own comparison. Personally, of the list above, I would chose four companies of similar “stature” as Southern Company: ITC Holdings, SCANA Corp, Connecticut Water, and Entergy/NextEra (tie). Author’s Note: Please review disclosure in author’s profile.

Market Lab Report – Premarket Pulse 1/21/16

Major averages attempted another bounce, this time on huge volume. The NASDAQ Composite finished close to breakeven while the S&P 500 was down about 1%. Both had long lower tails improving the odds of a temporary bottom. Both also retested prior lows with the S&P 500 retesting its October 2014 low. The rally was catalyzed by Fed futures which suggest, given the calamity in global markets, that the Fed is far less likely to hike rates more than once in 2016. US futures were pulled down overnight by China’s markets which have yet to find a floor. While the US Federal Reserve maintains its “no more QE” policy, the odds of central banks around the world taking additional quantitative easing measures is on the rise. China’s central bank earlier this week made its most aggressive cash injection in four years into the country’s financial system. And today, The European Central Bank’s president Mario Draghi, after keeping interest rates steady, said the ECB will review and ‘possibly reconsider’ its policy stance on rates at its next meeting on March 10 as global market turmoil raises downside risks. After being down earlier this morning, futures are now up at the time of this writing on Draghi’s announcement. Expect more volatility ahead.

Don’t Worry About The World Ending Today

It was another down week in markets with the Dow Jones dropping 3.03%, the S&P 500 falling 2.96% and the NASDAQ sliding 4.46%. The MCSI Emerging Markets Index also fell 2.30%. And U.S. futures suggested another big down day in the markets Wednesday. Big gainers in our portfolio included Illumina, Inc. (NASDAQ: ILMN ) , up 0.56%, and last week’s Alpha Investor Letter recommendation, Apple Inc. (NASDAQ: AAPL ) , which rose 0.48%. Well, so far 2016 has been all about markets hitting new lows. U.S. crude oil has hit its lowest level since 2003 with U.S. futures falling below $28 a barrel. MSCI’s index of Asia-Pacific shares ex Japan sank to lows not seen since late 2011. Japan’s market itself has fallen 20% below last year’s peak, thereby meeting the technical definition of a bear market. Chinese A-shares have fallen 14.83% in 2016 alone. Not a single one of the 47 global stock markets I track is up this year. With global stock markets off to their worst start in history – and yes, that includes 2008 – it’s no wonder that RBC Capital Markets noted that its polls of investors showed they were more bearish on Wall Street than at any time since mid-1987. That’s the year of the famous stock market crash when Ronald Reagan was still President. That’s quite a statement, as this period covers the emerging market meltdown of 1998, the dotcom bust and the global financial crisis of 2008. Frankly, I think these fears are overblown. Investors are throwing out the baby with the bathwater. Yes, commodity prices are slumping and global growth is more anemic than expected. But the financial system isn’t nearly as leveraged as it was in 2008. What about the months ahead? History has shown that market sentiment is always darkest before the dawn. RBS notes that every time investor pessimism reached current levels outside of an economic recession, the market was higher one quarter later by an average of 6.4%. Other studies by sentimentrader.com suggest strongly that if we do continue to fall, then the fall could be sharp – another 5-10%. Still, over the next six months and longer, stocks have an exceptionally high probability of showing a positive return. The bottom line? Strap yourself in for some further market turbulence, but don’t worry about the world ending today. It’s already tomorrow in Australia. Portfolio Update Berkshire Hathaway (NYSE: BRK.B ) dipped 0.81% over four days of trading in the past week. Reports of Warren Buffett buying into the weakened oil sector continue to surface, confirming that Mr. Buffett likes to buy low. Berkshire Hathaway acquired nearly six million shares ($450 million) of Phillips 66 in early January, bringing his total stake to 13%. This is the sixth-largest position in Mr. Buffett’s portfolio. BRK-B is a HOLD . Markel Corp. (NYSE: MKL ) was also flat in the past week, giving back just 0.18% as it spent the week trading sideways. Looking at the chart, MKL’s pullback appears to have halted directly on the mighty 200-day moving average (MA) – and for MKL, this is a price level not to be trifled with. MKL last touched down to this level in early 2014 only to go on an 18-month bull run, touch the 200-day MA once again, and move even higher. When the dust clears from the current market correction, this will be one of the first stocks to buy. MKL is a HOLD for now. Cambria Global Value ETF (NYSEARCA: GVAL ) fell 4.51% over the past week. Even the “cheapest” markets in the world became cheaper in the face of the latest global sell-off. As I have noted, not a single one of the 47 global stock markets I track are up in 2016. GVAL is a HOLD . Guggenheim S&P 500 Equal Weight ETF (NYSEARCA: RSP ) gave back 3.36%. This equally weighted take on the S&P 500 is down nearly 1% more than the S&P 500 Index (SPX) since the beginning of 2016, likely due to its higher weighting in small caps. When markets finally do turn higher, the opposite should hold true, and RSP should rebound quicker than its market-cap-weighted rival. RSP is a HOLD . PayPal Holdings (NASDAQ: PYPL ) pulled back 2.66% in the past week. PayPal will report earnings next week on Jan. 27. Although this relatively new stock has been driven lower by market forces, the outlook for PayPal remains positive among the community of analysts covering the stock. PayPal is an excellent long-term candidate in your Alpha Investor Letter portfolio, and possibly a good takeover candidate, as well. PYPL is a HOLD . Biotech ETF Market Vectors (NYSEARCA: BBH ) fell 5.75%. The bullish case for biotech remains intact, and BBH casts a diversified net to capture gains from this sector. An increasing population of aging folks, a growing demand for new drugs and growing healthcare costs should keep this sector on the rise. Mergers and acquisitions were also a major factor last year, and this trend should continue as well. BBH is a HOLD . Illumina Inc. ( ILMN ) bucked the negative trend last week to move 0.56% higher. Illumina is the global leader in DNA sequencing, and associated technologies, for applications in the life sciences, oncology, reproductive health and agriculture industries – just to name a few. ILMN will report earnings on Feb. 2 after markets close. ILMN is currently trading just under its 50-day MA and is a HOLD . Apple Inc. ( AAPL ) rose 0.48% over its first few days in the Alpha Investor Letter portfolio. Goldman Sachs recently released positive commentary regarding future AAPL pricing and set a price target of $155 – a potential 60% jump from yesterday’s close. That’s a huge number. Goldman Sachs further noted that any weakness is likely priced in at this time, making the recent sell-off even more of a positive entry point. AAPL will report earnings on Jan. 26 after markets close. AAPL is a BUY .