Utility Stocks: Down Big in 2015, Still Too High to Buy

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I have never lost money in a regulated utility. I have bought and sold gas and electric companies throughout my career and have never spilled red ink on myself.

utility stocks dukSure, on occasion, they’ve gone down after I bought them — but I’ve never sold one for less than I paid, and most of the time, utility stocks have provided me with a very nice gain.

My formula for profits in utility stocks is incredibly simple. When the economy is weak and everyone hates the group, I am a buyer of gas and electric companies that trade for less than book value. A few years later when economic prospects have improved and they sell for 1.5 to 2 times book or higher, I sell. Along the way, I collect a very nice stream of dividends that makes my total return even more attractive.

Again, I love owning these stocks and will buy them whenever the opportunity to do so presents itself.

So that’s why you should take it to the bank when I say that right now, I own zero utility stocks — and you shouldn’t right now, either.

I can’t find one single utility that trades below book value right now. In fact, the larger utilities all sell at levels where I would be more inclined to sell than to buy.

Consider Duke Energy (DUK) at current prices. Duke Energy is one of the largest utilities in the country, boasting electric operations in Carolinas, Florida, Ohio, Kentucky and Indiana, as well as natural gas operations in Ohio and Indiana. Wall Street loves the stock, and most of the brokerage recommendations are very positive right now. Meanwhile, the 4.5% yield should be plenty attractive to yield-starved investors.

However, DUK stock is trading at 2.2 times tangible book value. That’s highest multiple since 2000. Duke recently sold some unregulated operations and plans to use the cash to buy back stock, which strikes me as horrible idea given the current valuation.

Duke is a well-run company with some solid plans to increase generation capacity in the future. But the simple truth is that the price of DUK stock is just too high right now.

Edison International (EIX) is another stock that has richly rewarded investor that bight below book value and held for a couple of years. Investors who bought below book value in 2008 or early 2009 have more than doubled their money and collected more than 20% of the original purchase price along the way. The southern California electricity provider has recovered very nicely and rewarded bold shareholders who bought when the bear was growling the loudest.

Again, though, EIX trades at more than 2 times tangible book and is at its highest multiple in a decade. Several firms have upgraded the stock recently, but it trades at far too high a valuation to include in your portfolio.

Bottom Line

We can walk though dozens of similar examples, but I’ll save you the time: Not one single electric utility company trades at a discount to book value. Many of the larger ones trade at more than 2 times book value.

Yield-starved investors have been on a long buying spree that has sent utility stocks to valuations on the high end of historical levels — even after this year’s pullback. Worse, utility stocks are highly correlated to interest rates, so a rate hike from the Fed could spell the beginning of the end for these stocks.

Don’t buy utility stocks at these levels. If you own, consider sending soon.

As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/utility-stocks-duk-eix/.

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