8 Stocks for Finicky Value Investors

GRAY-HAIRED INVESTORS might recall a time when power company stocks were regarded almost as bonds in drag. Dividends were fat and share prices, like profits, were slow-growing but steady — just the thing for safe money.

No longer. More than a dozen states have lifted government electricity pricing over the past decade. That has brought new fortune to power sellers and their investors; over the past five years the Dow Jones Utilities Index doubled in price, four times the gain of the Dow industrials. Utility dividend yields have now shrunk to unremarkable levels.

Profit growth has also turned more erratic. While brisk in recent years, it is slowing now as soaring prices for coal and natural gas, chief sources of America's electricity, push power generators up against price caps in some states and angry customers in others. On Thursday, The Wall Street Journal reported on the plight of Texas, where six years after deregulation and its promise of lower prices through competition, electricity prices often double the national average, and during periods of peak demand sometimes jump far higher.

El Paso Electric (EE) provides power to West Texas and southern New Mexico. It grew profits by 90% in 2006, but by only 11% last year. Analysts foresee average growth of just 7% to 8% through 2011. That will come from price increases, since El Paso's jurisdictions allow it to recoup high fuel costs. It will also come from a return to full-capacity operations at an Arizona nuclear plant in which El Paso has a stake, and which has operated at just three-quarters of capacity in recent years due to maintenance snags. Nuclear plants provide 43% of El Paso's electricity. Natural gas and coal provide 28% and 7%. The rest is purchased.

If El Paso's growth outlook seems unexciting, its share price might add appeal. The stock goes for less than 11 times forecast 2008 earnings. It turned up recently in our finicky Three-Point Value screen, which looks for low price/earnings, price/sales and price/cash-flow ratios. Have a look at all eight screen survivors if you like, or run the search yourself using SmartMoney's stock screener and the full list of criteria.

El Paso pays no dividend. Management prefers to spend spare cash on share repurchases. In its first quarter it bought back nearly $10 million worth of stock, or just over 1% of the company's market value.

Beyond 2010, the outlook for power companies like El Paso seems likely to turn more interesting. By that time, the first plug-in electric cars will hit showrooms. As I theorized earlier this month, the gradual shift to battery power from gasoline power will reduce oil demand at the same time it creates soaring demand for electricity. Companies that depend largely on coal and natural gas might see margins pinched. Cheap nuclear providers like El Paso seem likely to prosper.

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