With winter right around the corner we thought it a perfect time to highlight some of the companies that are best positioned to take advantage of the cold months ahead. Utility stocks are generally thought of as boring but could be just the defensive play that your portfolio is clamoring for. For example, historically utilities pay a generous dividend and are less volatile (beta under 1.0) than the overall market. The coldest months of the year are coming up which means gas furnaces and hot water heaters will be working especially hard to keep American families comfortable. You could make the argument that this industry is somewhat shielded from the consumer spending slowdown because heating one’s house—for the vast majority of Americans—is not a luxury. Even the most financially burdened consumer is likely to make paying the gas bill a top priority.
So, using that logic, let’s take a look at one of the most undervalued gas utility stocks and then two of the most overvalued. We have included ratings history charts for each stock and the underlying research will be available for free on our website.
First, Ockham rates as Undervalued Energen Corp. (EGN) of Birmingham, Alabama. The stock has actually fared worse than the broader market losing more than half of its value year-to-date. Analysts have been backing off of cash earnings estimates for a few months now but the company beat reduced earnings estimates by twenty percent in its last quarterly financial report. Predictably, winter months have traditionally been the company’s strongest in terms of revenue and earnings. EGN is already selling below its historically normal ranges for both price-to-sales and price-to-cash flow. Were the stock to return to these historically normal ranges, we would expect to see the price in the high $30’s, which is not too hard to imagine since it was near $80 this summer.
As mentioned, Ockham is fairly bullish overall on this sector because of its defensive characteristics. However, there are two stocks we would like to bring to your attention that are not currently attractive from a value investor’s standpoint. First, Laclede Group (LG) has been a superstar recently and the stock is up substantially despite the market carnage. Although the company has recorded record earnings six years in a row, it is now Overvalued by standard valuation metrics such as price-to-sales and price-to-cash flow. In this market, that is not a suitable entry point for any stock. The company is obviously doing quite well but there are better value opportunities elsewhere.
Another gas stock we rate as Overvalued is Piedmont Natural Gas Co. (PNY). PNY has also enjoyed a nice gain this year but is also trading at too expensive an entry point and we would wait until the stock dropped below $28 to consider buying. PNY is too expense for a company that reported a net loss in its last quarter and analysts estimate that it will have a loss in the current quarter as well.
Those are just a few of the stocks that caught our interest in the gas utility sector. Again, we are overall fairly bullish on the gas sector coming into the coldest months of the year but we have our preferences. Energen would make a nice addition to the portfolio of any value investor who is looking to take advantage of an oversold market but also wants relatively minimal downside risk. After all, Warren Buffett is buying into the sector (Constellation Energy Group (CEG)) and historically he is pretty smart value investor.