Top Utility Stocks for 2010: NRG, AEE, AYE, UGI

Tuesday December 29, 2009 4:33 PM PST

By James E Brumley

We're still working our way through the best stocks of each sector for 2010. Our last installment in the series looked at the best financial stock bets on Monday. Today's focal point is the utilities industry... where the approach changes slightly. Our top ideas from the group are Ameren Corporation (NYSE:AEE), UGI Corporation (NYSE:UGI), NRG Energy, Inc. (NYSE:NRG), and Allegheny Energy, Inc. (NYSE:AYE). Below is an explanation of why.

Like value? UGI Corporation (NYSE:UGI) has it, even in comparison to the utility sector's generally cheap prices. UGI boasts a current and projected P/E of just a hair over 10 (which is better than average), but also has more of something that other utility names don't - measurable growth, and lots of cash flow relative to the company's market cap. That's how UGI Corporation scores high in value by almost all measures.... P/CF, P/S, PEG just to name a few.

UGI's dividend of 3.2% isn't bad either, though that's not quite enough to get excited. The growth side of the equation makes the stock a double-barreled bullish play for the patient investor who can stomach the odd volatility.

If the name Allegheny Energy, Inc. (NYSE:AYE) rings a bell, it might be because we suggested the stock - for a different reason - back on December 11th. Today's reason is a little different, but the optimism backing Allegheny Energy hasn't changed; AYE is a massive, technical turnaround opportunity that has the full support of the company's results.

There's no reason whatsoever to think the Allegheny Energy won't earn $2.17 per share in 2009, and $2.32 in 2010. This should get AYE out of its chart rut once and for all. And once it does, what an opportunity - Allegheny Energy shares are still less than half of where they peaked.

Ameren Corporation (NYSE:AEE) could be considered the dividend payer of the bunch, with a hefty 5.4% currently being paid back to shareholders on an annual basis. What's interesting about Ameren shares, however, is that it has glimmers of growth-stock behaviors.... like this year's move from $22 to $28 to break through some major resistance.

The dividend is protected too; AEE has topped earnings estimates - by quite a bit - in three of the last four quarters, yet is expected to make less in 2010 than it did in 2009? Yeah, Ameren Corporation is just being errantly overlooked. The market will likely catch the mistake soon enough, at your benefit.

And finally, NRG Energy, Inc. (NYSE:NRG) may ring a bell as well since it too was part of our December 11th bullish outlook on electric utility stocks. Nothing's really changed since then; NRG Energy still sports one of the lowest P/E ratios in the group, current or forecasted. And, considering the company has been earnings between $0.70 and $1.00 per share without any quarterly accounting 'help', the estimated operating EPS of $2.08 is very questionably low for NRG.

The recent dip is rooted in the latest round of a preferred stock conversion, which should be complete in late January. NRG Energy, Inc. are being sold in anticipation of the event, however, which means the disfavor of the event is likely being priced in now - not later. That's the opportunity.

Like we mentioned earlier, the flavor changes slightly when we talk about utility stocks. We've sought cheap companies in all the other sector's, but were attracted to them because they had so much growth potential. When it comes to utilities, even the prospect of growth is still no greater than the value/income side of the analysis. That's ok though - consistent dividend income is aggressive too, if you're doing something fruitful with it.

Here's a price/earnings ratio snapshot and history. As you can see, all four are currently on the low end of P/E scale.