SIVY ON STOCKS from money.com
May 18, 2001

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Unrecognized power plays

These five electric utilities are undervalued and under-appreciated by
analysts. But they offer superior long-term returns.

By Michael Sivy

Given the recent turmoil in the stock market and uncertainty about the
economy's prospects for the rest of the year, many investors have been
diversifying their portfolios with income investments. In March, for
instance, shareholders pulled a record amount of money out of equity mutual
funds -- the last time stock funds saw comparable outflows was in the
aftermath of the 1987 crash. Much of the money has gone into income
investments, and especially bond funds.

Funds that invest in Treasury bonds and other high-quality long-term issues
are especially popular. Personally, though, I think there are better
alternatives that offer higher yields, more flexibility and long-term
growth potential. Preferred shares, for instance, can offer yields of more
than 7 percent, compared with 5.8 percent for Treasuries. (For more
information on these unique investments, see "Preferred shares: uncommon
values").
[ http://www.money.com/money/depts/investing/sivy/archive/001020.html ]
And they generally sell in round lots costing only about $2,500, versus at
least $10,000 for most bonds.

My top income choices, however, are utility stocks, and for one very simple
reason: rising dividends. When you buy a bond or a preferred stock, you
lock in a certain level of return. And since there is always some
inflation, the real purchasing power of your income erodes over time. But
most electric utilities offer long-term dividend growth. Even though
utilities' earnings increases don't look like much compared with the growth
rates of tech stocks, even 5 percent or 6 percent a year will keep you
ahead of inflation -- and eventually outpace the return on bonds (see
"Selecting stocks for income,").
[ http://www.money.com/money/depts/investing/sivy/archive/001016.html ]

One of my top utility picks over the past year has been Duke Energy [DUK],
an electric company based in the Carolinas. In addition to having a
well-run local business, Duke has profited enormously because one of its
subsidiaries provides power to the California market where electricity
prices are soaring. As a result, the stock has gained 50 percent since I
first recommended it last summer. I still think Duke has attractive
long-term prospects, but obviously it's not as good a buy as it was a year ago.

Where are today's best values in the electric utility sector? For the
answer, I turned to the Leuthold Group, a value-oriented investment
advisory firm in Minneapolis that regularly does a quantitative screen for
stocks that are undervalued because they are out of favor. Of the 53 stocks
the most recent screen identified, 10 are electric utilities. Of those,
I've winnowed out five that have solid finances and offer projected
earnings growth of 5 percent or more over the next five years. In addition,
these electric companies have modest P/Es, based on this year's estimated
results.

The five include DTE Energy [DTE] at $43.40 a share. The parent company for
Detroit Edison is in the process of acquiring MCN Energy, a Michigan gas
company, which could boost the combined firms' long-term earnings growth.
In the meantime, DTE pays a 4.8 percent yield and trades at a 12.2 P/E.
FirstEnergy [FE], the holding company for Ohio Edison, is in the middle of
a complicated attempt to acquire GPU, and uncertainty about the deal has
depressed the stock. Whether it goes through or not, at $29.40 a share,
FirstEnergy offers a 5.1 percent yield and a 10.4 P/E.

OGE [OGE] Energy is the holding company for Oklahoma Gas & Electric. At
$22.10, the stock offers a 6 percent yield and a 12.5 P/E. Pinnacle West
Capital [PNW], parent of Arizona Public Service is expanding its generating
capacity in the Southwest. At $49.50 a share, this growth-oriented utility
pays a 3 percent yield and trades at a 13 P/E. Finally, Potomac Electric
[POM] supplies power to Washington D.C. and the surrounding area. The
company is acquiring the Delaware utility Connectiv, in a move that should
enhance long-term returns. At $22.40 a share, Potomac Electric carries a
4.4 percent yield and a 12 P/E and should grow as long as Washington keeps
expanding.

###

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