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Bears In Utilities For July 17

By Ayton MacEachern

Tickers in this Article: NTL, TEO, SJW, RRI, HNP, AEP, DUK

The utilities sector has historically been a sector that investors have poured into in times of economic trouble. People still need water, power, heat, and telephones - even when it feels like the sky is falling everywhere else. We are currently in an economic slowdown, as house prices and investment values fall, creating a lack of discretionary income with the average U.S. citizen. With oil and food prices increasing, this problem is not only limited to the U.S. Slowdowns and investment losses are being felt across the globe. Now would seem like one of those times that we would think utilities would be doing better than most. (Find out how these securities can protect you from a market bust, in Guard Your Portfolio With Defensive Stocks.)

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Utilities usually have to take on large portions of debt due to their massive infrastructure needs, and it is because of this that the companies usually do better in a lower interest rate environment. As interest rates fall, and remain lower, debt payments are reduced, allowing more profits to be passed on to shareholders. U.S. interest rates are extremely low right now, as the FOMC has reduced the federal funds rate to just 2.0% over the past year or so; another bullish signal for the utility sector.

So, considering that the environment is almost perfect for a utility company to provide stellar returns, why have losses as large as the five we will present here, occurred? Let us take a closer look at these decliners, and see if some opportunity exists.

Company	One Month Loss*	Market Capitalization
Nortel Inversora (NYSE:NTL)	30.3%	$1.1 Billion
Telecom Argentina (NYSE:TEO)	25.1%	$2.5 Billion
SJW (NYSE:SJW)	24.6%	$440 Million
Reliant Energy (NYSE:RRI)	23.6%	$6.6 Billion
Huaneng Power (NYSE:HNP)	22.5%	$8.1 Billion
*Data as of market close July 15, 2008

Can You Rely on Reliant?
This is not the first time that Reliant Energy (NYSE:RRI) has fallen to lows. When ill-fated Enron collapsed, Reliant - along with many other energy providers - fell along with it. On December 2, 2001, Enron filed for bankruptcy, and so began the decline of many stocks in the sector. Reliant's shares continued to fall from a high of around $34 before the bankruptcy of Enron, hitting a low of around a dollar in mid-October of 2002. Since then, shares have picked up, breaking $30 in July of last year, but has since fallen below $20 again.

From a financial perspective, Reliant looks in good shape to do well in the near future. With quarterly revenue growth of 19% year-over-year, it is growing much faster than the industry average of just 7%, including competitors Duke Energy (NYSE:DUK), and American Electric Power (NYSE:AEP), whose quarterly growth is 10% and 9% respectively. Another interesting metric is the price-to-sales ratio. Reliant has a P/S of less than 1, indicating that the stock is actually trading at less than the sales per share. Great to see, especially knowing that sales are growing at such a fast clip.

Reliant looks good for the future as well. It will be spending $50 million to reduce mercury emissions in five of its coal burning plants. Reliant has said that it expects this retrofitting to reduce mercury emissions by 80%. It is important to note that a quick look at the balance sheet shows that Reliant has over $1 billion in cash, so this outlay should not have any effect on financial performance in the future. In a more environmentally responsible world, it is important for companies such as Reliant to take steps towards providing energy while minimizing the effects on our environment. Companies that act now have a leg up on those that procrastinate and only change when regulations force them to. (To learn more on this topic, read our related article Clean Or Green Technology Investing.)

Add Your Two Cents
What do you think will happen with Reliant Energy going forward? Will its solid finances and strides towards producing cleaner energy be enough to bring it back to its highs again? Be sure to join me (aytonmm) in the FREE Stock Picking Community to share your thoughts and see what other investors are saying.

For further reading, be sure to check out Cyclical Versus Non-Cyclical Stocks.

By Ayton MacEachern

Ayton MacEachern is the Senior Financial Editor at Investopedia.com. After receiving his bachelor's degree in financial services from Mount Royal College in Calgary, Alberta, MacEachern began his career at an international securities trading firm. Before joining Investopedia in 2008, MacEachern worked in a variety of roles in the financial industry, including workers' compensation insurance underwriting, financial planning, and equity, currency and options trading. MacEachern is also Co-Founder of theskipper.ca, a source for online outdoor education.

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