2 Energy Stocks to Buy, 2 To Avoid

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According to the Energy Information Administration (EIA), the rising costs of infrastructure upgrades will drive the residential electricity rates up in 2013. The EIA expects rates to increase by 1.7% in 2013 and 2% in 2014. The total electricity generation is expected to grow 0.5% in 2013 and 0.8% in 2014. As per the EIA, coal is expected to become slightly cheaper than natural gas in the coming years, so the electricity generated by natural gas would fall from 30.3% in 2012 to 27.6% in 2014. As a result, electricity generated through coal would rise from 37.4% in 2012 to 39.1% in 2014.

Talking about the energy sector, I have discussed four stocks below, out of which two are expected to outperform the other two in the coming years.

Northeast Utilities

The public utility holding company Northeast Utilities (NYSE: NU) is engaged in the energy delivery business through its subsidiaries. It is trading at a forward P/E (1yr) of 15.29x and has a dividend yield of 3.60%. It has a strong PEG of 2.46 and a growth rate of almost 9%. Incorporating its dividend yield into its PEG gives us a healthy PEGY of 1.75. NU’s PEGY is one of the lowest in the energy sector, which makes it one of the best buys in the industry. A mean recommendation of 2.1 on the sell side testifies the fact that NU has a significant upside potential at this moment, making it a must buy.

American Electric Power Company

The American Electric Power Company (NYSE: AEP) delivers electricity to more than 5 million customers across 11 states in the United States. It is trading at a forward P/E (1yr) of 13.95x and has a dividend yield of 4.20%. It has a PEG of 3.24 and a strong PEGY of 1.67. Just like Northern Utilities, AEP’s PEGY is one of the lowest in the industry. This depicts the fact that it’s a hugely undervalued stock. A mean recommendation of 2.3 shows that American Electric Power is one of the top buys in the energy sector.

Atlantic Power Corporation 

Based in Boston, Massachusetts, Atlantic Power Corporation (NYSE: AT) is a power generation and infrastructure company that operates in the United States and Canada. It yields a strong dividend of 9.40%. However, it has a negative operating margin of almost 14%. It has cash per share of $0.36, which is only 0.32 times its current dividends. A current ratio of 0.75 shows its weak liquidity position, so it won’t be easy for the company to sustain its dividends in the coming years. A look at the mean target price on the sell side shows that AT is trading almost at its fair value; therefore, it doesn’t have any upside potential. It has a mean recommendation of 3.4 on the sell side, which shows that it isn’t a good buy at this moment. The bottom line is that we don’t recommend buying Atlantic Corporation at this point in time.

TECO Energy

The holding company for utilities, TECO Energy (NYSE: TE), is trading at a forward P/E (1yr) of 17.07x that is somewhat high for the energy sector. Hence, it’s a rather expensive buy at this moment. The company reported 4Q12 earnings of $0.21, which declined from the previous year, while the revenues were also down 17%. TECO Energy has a mean target price of $17.60 on the sell side, showing that it’s almost fairly priced in the market. Having said this, a mean recommendation of 3 on the sell side doesn’t help either. In short, we don’t recommend buying TECO Energy at this moment.

Conclusion

Natural gas prices are facing a downward trend in the United States, but in the next two years coal is expected to be cheaper relative to natural gas. As a result, most of the power generating companies are turning towards coal. In short, generating electricity through coal would be a priority for the energy companies.

 

 

 


Vamosrafa7 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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