Sometimes the market drops the ball.
That's when value investors strike.
In this case, investors should look into one area the market
left behind in the rally: Utilities. Many of these companies were
beat up during the selloff, but because of plummeting natural-gas
prices, they didn't participate in the rally.
Natural gas is the country's second-largest fuel source for power
generation. The bottom fell out of the natural-gas market more than
a year ago, and electricity prices sank with it. The industry built
a significant amount of storage capacity as inventories increased
+15% higher than the five-year average, according to the Energy
Until winter comes and people turn their heaters on, supplies
will remain high. That shouldn't last for long, especially as
winter is approaching the northern part of the country.
Some utilities still trade at the same levels they did in March,
even after a rally of more than +60% in the S&P 500. The market
downturn combined with falling natural-gas prices created the
perfect storm, and some utilities were left for dead.
The assets of these companies can still be had for
embarrassingly cheap prices.
)$13.366.7%11.30.77Pepco Holdings (
These companies are trading at steep discounts to their asset
values, shown by the price-to-book value (P/B) measurement. You can
calculate book value by subtracting liabilities from assets on a
company's balance sheet and dividing that number by the number of
shares outstanding. This figure is known as per-share book value.
To see what the market is paying for those assets, divide the
company's share price by the book value per share. Anything over
1.0 is the market's value of the company's underlying business.
But the market isn't even paying full price for the assets of
these utilities. They are paying less for the company that the net
value of its transmission pipelines, power-generating equipment and
other tangible property. Three out of the four companies in the
table are profitable, but the market is paying nothing for those
profitable businesses. Even with the headwinds facing utilities,
that's hard to believe.
And it's not likely to last long.
These companies are a safer way to play natural gas than buying
natural gas futures with troublesome funds like the
U.S. Natural Gas Fund (
, which trades for a +4% premium. But they're also value plays,
trading for discounts of -20% or more.
The best part about this sector: Generous dividends. So while
investors wait for a recovery in prices, they can collect a fat
quarterly check in the meantime.
This year, the Natural Gas Supply Association expects demand to
be flat compared with last year, but there are a few wild cards at
play. Forecasts suggest a slightly warmer winter for some part of
the country, but that could be offset by a much colder winter in
the Northeast. Economic conditions also could improve and cause an
uptrend in prices. This could have even more of an impact on prices
than the weather.
The best pick in the table above is
, a holding company that stores and distributes natural gas from
the Gulf Coast to the Northeastern corridor. Its 3.8 million
customers make it the best positioned utility to benefit from a
cold winter in the Northeast.
NiSource's shares are up +35% for the year, but still trade at a
-20% discount to book value -- while paying a generous 6.6%
Natural-gas prices won't stay down for long. If the Northeast
freezes this winter, or a recovery sets in, expect Nisource's
shares to continue their winning streak.
Disclosure: Brad Briggs does not own shares of any security
mentioned in this article.
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