PEOPLE GENERALLY

don't think too much about electric utilities until their power goes out, at which point there's nothing else in the world that matters. The 45 minutes when power was out on my block this summer seemed endless, and when my water was briefly shut off, it quickly felt as if I were living in the middle ages.

The basic utilities electricity, water, natural gas and phone service aren't merely parts of the economy, but form the basic framework for society to function. Ask anybody rebuilding after a hurricane in Florida or war in Iraq: Without stable, high-quality utilities, life just grinds to a halt.

Under communism and other forms of centrally planned economies, power and other utilities were routinely rationed, interrupted or simply not available. By contrast, despite some onerous regulations in the U.S., we have made services once considered luxuries cheap and plentiful enough for almost everyone to afford. In America, someone living in "poverty" not only owns a color TV, but also can afford the electricity to power it for hours on end.

So while I've always respected utilities, I've very rarely owned them. Until now. And while I'm still sitting on a pile of cash, over the past few weeks I've also purchased a quirky portfolio of utilities. Yes, I know there's a chance interest rates could rise. And I knowSee the chart

In the markets, uncertainty is the norm. No matter how much research I do, there's no sure thing. I keep my bets reasonable and focus only on my most compelling trades. I know what I like, and right now when I look at utilities, I like what I see.

If a sector is going to interest me over the long haul, it's first going to interest me over the short haul. And while recent stock-market action has been marked by choppy, uneven and trendless trading, electric and natural-gas utilities have been persistently chugging higher now for more than two years. Without an abundance of media coverage or chatter on the message boards, utilities continue to exhibit the measured, under-the-radar screen price action of a bull move not yet run its course. Moreover, they've done it through all sorts of market environments, with interest rates and energy prices rising and falling along the way.

What has struck me about the recent rally is that, unlike defense or food stocks, utilities appear to be strong across the board. As regular readers know, I look for group movement. I don't want to find a "story" stock or search weak sectors for one diamond in the rough. For my clients' money, I focus what I believe to be the highest-probability trades: stocks in which the entire group is strong, not just a few standout names. That appears to be the case within electric and natural-gas utilities, where tons of stocks, big and small cap alike, seem intent on forging higher even as the broader market sputters.

Of course, because there's a bid and an offer for every stock, there's always a bullish and bearish argument as well. And although utilities have performed well in recent months, they could just as easily be overvalued and ready for a drop. As enthusiastic as I am about the sector, I'm also humble enough to know that in the markets, anything can happen.

And it's for that reason that I've always believed it's not what you buy, but how you buy that ultimately matters. Every trade won't work out. A thoughtful approach will help maximize the profits on those precious few that do. And while a disciplined approach doesn't eliminate losers, it will help mitigate their effect on your overall bottom line.

To reel in the big fish, you've got to cast a wide net. So when a particular sector catches my eye, my preferred strategy is to focus on a half-dozen or so of my favorite names, buying equal-sized positions in an allocation that accounts for, at most, around 15% of my overall portfolio.

What inevitably happens is that out of six stocks, two will drop and hit stop-loss limits, two will thrash around and go nowhere and one or two if I'm truly lucky will actually get a bid and grow to become a profitable, winning trade.

From my perspective, there are a few distinct advantages to buying individual stocks over, say, an exchange-traded fund that tracks utilities. As we first wrote a few years back, ETFs tend to be heavily weighted toward the most liquid and largely capitalized names. The $22 billion Southern Company accounts for around 6% of iShares Dow Jones U.S Utilities Sector Index Fund; $700 million El Paso Electric doesn't even crack the top 10 holdings.

Plus, although an ETF gives you instant diversification, the fact you're buying a portfolio of stocks makes it impossible to weed out underperforming ones you'd rather not own. Diversification becomes your downfall if you're compelled to drag around an entire sector when there are only a few strong companies you actually like.

By purchasing individual stocks, essentially assembling my own mini-portfolio, I'm able to trade out of weak stocks and focus on the strong ones, a luxury not available if you simply buy a mutual fund or ETF.

Among my current holdings is Scottish Power, a large European concern that provides power to more than 6 million customers in the western U.S. and the United Kingdom. The stock sports a 4.88% dividend yield and is far from a herd favorite, with institutions owning only 6% of the tradable float.

Another international comapany worth a look is Korea Electric Power Corp., a state-controlled utility that provides more than 95% of Korea's electricity. The fourth largest stock in Korea by market cap has been in a tight trading range between $8 and $11 for the better part of three years, but traded for more than double that price back in the mid 1990s.

KeySpan is the dominant energy player in the Northeast U.S., serving as the region's largest distributor of natural gas as well as the biggest investor-owned electric generator in New York State. A member of the S&P 500, the stock sports a 4.5% dividend yield and seems positioned to revisit its 2001 high of $40.

Finally, I've taken a position in National Fuel Gas Co., an S&P 400 company diversified across a number of businesses including pipelines and storage, exploration and timber. Among its most unique assets is Horizon Energy Development, a leading power concern in the Czech Republic. The stock has been moving higher on increased volume, one indication that the bigger institutional money is likely moving in.

Dow Jones Utilities vs. Dow, Nasdaq, S&P 500

APPLET PLACEHOLDER: archive= height=300 width=450

Data from April 12, 2004 to Sept. 10, 2004 Source: DJNR

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. At the time of publication, Mr. Hoenig's fund held positions in many of the stocks mentioned in this article.