Utility stocks are essentially stocks that are in the business of providing electricity and other sources of power to consumer, commercial and industrial clients. It also includes delivering water to these same clients.
Basically, the trade off for traditional utilities is that they get a competitive moat built by the government in exchange for a higher level of regulation by federal and state authorities. For investors, this is makes them great long-term investments.
In the old days, they were the original “widows’ and orphans’ stocks,” meaning that they were safe for even the most vulnerable portfolios. But deregulation in the late 1990s did a number on many of these firms and many have been scrambling ever since, especially after the global financial meltdown. Some are having trouble competing in new technologies and others are having a tough time because of milder winter weather.
While there are some solid names out there, sometimes it’s better to know what not to buy rather than what to buy. Following is the former: Seven utility stocks that are neither widow nor orphan approved.
Utility Stocks to Avoid: Ferrell Gas (FGP)
Ferrellgas Partners, L.P. (NYSE:FGP) is a Kansas-based distributor of natural gas and crude oil around Kansas City. It’s operated for more than 80 years now, so it has a significant presence in its market.
As a limited partnership (LP), it treats shareholders as owners and is legally bound to distribute all net operating profits out as dividends to shareholders. Basically, this is a good deal for the company, since it doesn’t have to pay out what it isn’t making.
When the company is losing money (as it is now because the mild winter sent demand through the floor), it has to cut its dividend. And the market hates that.
FGP stock is off almost 12% year to date and its 6.5% dividend is in trouble again because the high demand winter is over. There’s just too much risk here and the dividend is providing little comfort.
Utility Stocks to Avoid: Sky Solar (SKYS)
Sky Solar Holdings Ltd (ADR) (NASDAQ:SKYS) is a modern version of a utility, called an independent power producer (IPP). During the deregulation craze, many utilities built out their IPP businesses to try and maximize profits by having a market-oriented business as well as their regulated business.
As Enron’s implosion showed, that model wasn’t sustainable and most large utilities lopped off their IPP businesses. But some producers saw the opportunity in expanding in the IPP niche, especially when transitioning to renewable energy became a global trend.
SKYS is an IPP looking to take advantage of that global trend. And with more than 200 projects on five continents, it is making every effort to realize that opportunity.
The problem is, it’s a tiny global company (a market capitalization that’s just under $100 million) and not only does it have to compete against bigger local firms and bigger IPPs, but it has to also weather the weak global economics cycle we’re in.
And where broad geographic exposure should be an advantage, here it’s become more of growing risk.
Utility Stocks to Avoid: Dynegy (DYN)
Dynegy Inc. (NYSE:DYN) is the third largest independent power producer (IPP) in the U.S. But before a 2015 merger with Duke Energy Corp (NYSE:DUK) and Energy Capital Partners, it was the eighth largest IPP.
It looked like a growing IPP on track to make its mark in the power industry in the Midwest and Mid-Atlantic, where DYN runs power generation plants in 12 states.
Unfortunately, its ambitions have been muted by mild winters and a sluggish economy. And while the deals were mostly cash — no debt — DYN still has to make those operations profitable to justify the expense. And that isn’t happening yet.
Plus, as an IPP, this is more a growth stock than an income stock, so there’s no reason to hold it unless it’s growing. Off 45% in the past 12 months, there is no incentive to get back in now that its best sales season is behind it.
Utility Stocks to Avoid: Calpine (CPN)
Calpine Corporation (NYSE:CPN) is an Houston, Texas-based IPP that has operations in more than a dozen states across the U.S. and Canada. Most of its operations are were purchased in 2010 when CPN bought Conectiv Energy assets.
Many of those units are ‘black-start’ operations, meaning they start up when the grid in that particular area goes down. CPN is paid by a utility to essentially provide this service and keep its systems operational until needed.
It also has a significant geothermal power generation division and natural gas fired power plants in the West, particularly in California. Things were looking bullish for CPN as the multi-year drought continued in the state people were becoming increasingly interested in alternative energy sources.
But the recent rains have dumped lots of snow in the mountains and filled the parched reservoirs. That has boosted hydroelectric power plants’ output and made it tough to competing IPPs powered by natural gas. Off 11% in the past three months and 25% in the past 12, it’s best to steer clear.
Utility Stocks to Avoid: Korea Electric (KEP)
Korea Electric Power Corporation (ADR) (NYSE:KEP) is essentially the power company of South Korea. Its most attractive feature is its mouth-watering 7% dividend. The problem is, the stock is off 21% in the past 12 months, so even with that dividend, you’re still 14% in the red. Not so mouth-watering now.
About 85% of its power production comes from coal and nuclear, which isn’t necessarily a bad thing. But the coal is imported and the nuclear is going to get tougher to manage now that Westinghouse — the major nuclear power plant maker — is in bankruptcy and will likely end up in Chinese hands.
The biggest challenge KEP has now, however, is the fact that North Korea is its neighbor and the current leadership there is creating a lot of diplomatic instability. And the U.S., which has a sizable military presence on South Korea’s border with North Korea, is talking tough with North Korea’s leader, Kim Jong-un. This is way too much instability for a utility stock.
Utility Stocks to Avoid: Atlantic Power (AT)
Atlantic Power Corp (NYSE:AT) is an IPP that operates 23 power plants in the U.S. and two in Canada. It sells electricity to utilities under long-term contracts.
While recent performance of the stock has been solid and it delivers a respectable 3.4% dividend, it is just a shadow of what it was before 2013. In late 2012, the stock was trading around $15 a share. Today, it’s around $2.65, and it’s been trading at that level for the past 4 years.
There are some investors who see a turnaround in store for AT in coming quarters. But that is more hope than fact. Most the utilities it sells power to are having a tough time making money given the mild weather and are looking to cut costs wherever they can. One of the first places they’ll cut is outside vendors.
And if they don’t cut the services they’ll renegotiate less generous contracts. There’s no need to hang around and wait for that to happen. If you can “bottom fish” a stock for four years, it’s not a trend, it’s a long-term problem.
Utility Stocks to Avoid: AES Corp (AES)
AES Corp (NYSE:AES) is a global IPP that always has been a player in the energy field, but generally has more bad years than good ones.
Given its exposure on four continents, its best years were before 2008. And for the past decade, it’s been trying regain its momentum. But that’s hard when emerging market economies as well as developed nations’ economies are sputtering along.
For example, AES has significant operations in the Brazil. The Brazilian economy was going gangbusters, especially as it ramped up construction for the Summer Olympics and the World Cup. But then, as often happens in developing economies, the bottom fell out. And the problems with the economy were finally exposed.
To a lesser extent, AES has seen its business in Europe and the U.S. go through the same challenges. And even now, these developed economies are no longer reliable markets for AES. Its 4.3% dividend is attractive, but after the stock’s year to date -4.5% performance, you’re better off with a less “exciting” stock.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.