3 Utility Stocks to Avoid in 2013

Santa may have gone back to the North Pole until next year, but I'm always making lists and checking them twice to find out which companies have been naughty and nice. With our calendars having rolled over to the new year, it's time we take a closer look at the utility sector.

Yesterday, I examined three utility companies you could buy in 2013 without much fear. Despite what might appear to be a sector filled with high dividend yields and steady cash flow, today we'll look at three utilities you'd be better off avoiding in 2013.

AES Corp. (NYSE: AES  )
It's not that AES Corp., a diversified utility operating in 27 countries around the globe, doesn't have a good amount of exposure to different energy sources, because it does. My concern around AES stems from its ability to produce organic growth without the aid of acquisitions, and the threat for rising fixed costs and regulatory troubles in Latin America and South America to hurt margins, among other factors.

Usually, being concentrated in emerging markets would shield an energy provider from a first-world slowdown, but it's a bit different for energy stocks like AES, which could be dealing with a rise in costs as businesses within those countries look to make up ground for lost business in any way possible.

Also, AES is one of the worst capitalized and least shareholder-focused electric utilities I can find. This utility's balance sheet boasts net debt of $19.4 billion, of which cost cuts and share buybacks have driven most of its recent EPS growth. Top it off with the fact that AES failed to pay shareholders a dividend for nearly 20 years (instituting a $0.04 quarterly payout only last quarter) and I feel you have all the makings of a utility to keep your mitts off of in 2013.

Edison International (NYSE: EIX  )
There's just something about a California-based regulated electric utility that scares the daylights out of me! This year I'd recommend keeping your distance from much of the utility sector, with a big focus on Edison International.

The reason for my concern stems from new regulations issued by the California Public Utilities Commission, which call for rate declines across the board for Pacific Gas & Electric (NYSE: PCG  ) , Edison International, and San Diego-based Sempra Energy (NYSE: SRE  ) . Sempra, luckily, has a myriad of operations outside of California, which should shield it from a big margin hit. PG&E has an amazing array of hydroelectric generating capacity that bodes well for an Obama administration that supports alternative energy. Edison, on the other hand, could stand to see some serious margin headwinds with fewer alternative energy projects in play, a focus solely within California, and nearly $14 billion in net debt. If California's shaky economy didn't give you enough reason to avoid a company with little to zero organic growth, then perhaps its below average 2.9% yield is enough reason to skip Edison in 2013.

Clean Energy Fuels (NASDAQ: CLNE  )
I know I'm sort of skirting the definition of a gas utility with Clean Energy Fuels, a provider of natural gas and liquefied natural gas for vehicles, as well as an operator of alternative energy fuel stations, but it's nonetheless a company I'd keep my distance from in 2013.

This is the type of company that's great conceptually and will benefit slowly as automakers like Ford (NYSE: F  ) and General Motors (NYSE: GM  ) roll out vehicles, such as the Ford Fusion, or Chevy Silverado and GMC Sierra, capable of running on natural gas. However, according to research gathered by ExxonMobil, only 2% of all U.S. transportation consumption in 2010 was based on natural gas, with much of that demand coming from city fleets like buses and taxis. A whopping 90% was still petroleum-based in the form of gasoline, diesel, or jet fuel! The concept of cleaner burning natural gas is alluring, but no automaker is going to steer its production line away from gas or diesel in one swoop when the infrastructure needed to encourage consumers to purchase a compressed natural gas powered vehicle just isn't there. With losses expected again in 2013 for Clean Energy Fuels, I think you'd be better off avoiding the company and tempering your intermediate-term expectations.

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Read/Post Comments (14) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 08, 2013, at 12:49 PM, Rich2000ac wrote:

    I strongly disagree regarding CLNE. Natural gas is the future, especially for trucks and fleet vehicles.

  • Report this Comment On January 08, 2013, at 12:56 PM, Waben920 wrote:

    Here again, in your article today about Utility stocks. You recommend to keep your distance from CLNE. In previous articles you recommend CLNE. You send mixed signals about stocks! Talk about being volatile, You're up and down on your recommendations.

  • Report this Comment On January 08, 2013, at 1:43 PM, TMFUltraLong wrote:

    Waben920,

    We have a motley of contributors at The Motley Fool with a wide variety of opinions as you've noticed. We won't always agree and that freedom of opinion - as long as you're willing to transparently and openly own up to your call - is what I love most about working for TMF. For the record, I've personally never been a fan of CLNE and have been negative on its outlook since I first wrote about the company.

    TMFUltraLong

  • Report this Comment On January 08, 2013, at 11:13 PM, nittneylions wrote:

    I would agree if it was a blog, but an article that appears to be a Motely Fool standing is a different story. I agree with Wanben920, I too was tracking and bought some of CLNE due to many recommendations including the one on MF.

    I will keep CLNE. They appear to have a strong future.

  • Report this Comment On January 09, 2013, at 12:49 PM, revjimbo wrote:

    including CLNE in your group was a cheap shot. You are indeed a fool, a cheap fool.

  • Report this Comment On January 09, 2013, at 5:01 PM, TMFVelvetHammer wrote:

    Sean-

    I am really disappointed in what you have written about CLNE.

    Not that you are bearish-to the contrary- as an owner of CLNE I want to see reasons why my investment thesis may be flawed.

    What I take issue with is that your evaluation disregards what CLNE is targeting. Ford and GM's vehicles, especially the ones that you mention, have absolutely nothing to do with CLNE's target market. CLNE is targeting the heavy-truck business, which means Volvo, Cummins, Freightliner, et. al., companies that make big trucks, and the engines for them. And it's about the extreme premium price of deisel (which is much higher than gasoline) as compared to natural gas, and how truckers can reduce their fuel costs significantly. It has ABSOLUTELY NOTHING to do with Ford Fusions, or even GMC pickup trucks. NOTHING AT ALL.

    Frankly, your commentary is ignorant and misleading, and I am surprised and disappointed to see that from you. I am typically a fan of what you write, and while I have disagreed with you in the past, it wasn't because you didn't have your facts straight. Please get them right next time, and give me a valid reason that CLNE is a company to avoid.

    -jh

    CLNE Ticker Guide for Stock Advisor

  • Report this Comment On January 09, 2013, at 5:15 PM, TMFUltraLong wrote:

    elihpaudio,

    To me the case for avoidance on Clean Energy Fuels is simple.. it's infrastructure. If the infrastructure isn't there, automakers like Ford and GM aren't going to put big dollars toward CNG spending. Natural gas only represents about 2% of all fuel sales at the moment and it could "maybe" double to 4% if more cities get their acts together and get their buses running on CNG.

    The argument that truckers will be using NG to power their engines seems like a possibility in 10-15 years, not in the immediate future. Multiple trucking companies have upgraded their fleets and aren't an a seriously disadvantageous position where swapping their diesel fleets out for NG would make sense... simple as that.

    You might think GM and Ford have no bearing, but these are the pillars of the industry and Cummins, just as any other engine maker, is going to use these two as cues for where they should head next. Unless the U.S. government is going to get serious about emissions and gas mileage, we're going to see this same slow n' go acceptance of NG and very little infrastructure build-out.

    In short, I predict CLNE could still head lower.

    Hope that explains my opinion a bit better.

    TMFUltraLong

  • Report this Comment On January 09, 2013, at 8:05 PM, TMFVelvetHammer wrote:

    Sean-

    You are missing the entire thesis. Go here:

    http://www.cleanenergyfuels.com/index.html

    See the green boxes?

    Trucking. Refuse. Transit. Airport/Taxi/Shuttle.

    Nothing about private automobiles that "Joe Public" commutes to work in, or takes the family to Disney World in.

    Eventually, maybe. But it's really all about vehicles that either move lots of stuff at one time, or lots of people at one time, and that's not Ford or GM, who aren't even involved in heavy trucking, so calling them "pillars of the industry" is not even close. Try Paccar (Peterbuilt and Kenworth), Volvo, Navistar (International, which actually features NatGas on the website very prominantly, FWIW) and Mack. At least domestically and in Europe, these are the "Pillars."

    Again, you could very well be right about CLNE. I am sure that at some point this year, the stock will probably be lower than today, maybe by a large margin.

    But if you are right, it won't have anything to do with your flawed evaluation. I respect your opinion and your writing. You are one of my favorites. I just think your thesis ignores what Clean Energy Fuels is focusing on to drive and grow their business. And it's really all about trucking right now.

    Thanks for tolerating my very direct comments. I mean no disrespect at all. As I said, I am a big fan and value your opinion. When you aren't just plain missing something as big as you are this time... :)

  • Report this Comment On January 09, 2013, at 10:58 PM, TMFUltraLong wrote:

    elihpaudio,

    Never a need to apologize for defending your opinion in a respectful manner.

    Your points are valid and I can see Clean Energy's push toward trucking, but I've stated my assertion that I don't see NG making a big push into trucking for much of this decade. Most trucking fleets have been recently upgraded, so the need just isn't there... while checking around into the trucking sector, one of my favs for 2013, I was noticing that the average age of most fleets is 2-3 years. There's no cost-effective reason for trucking cos. to be switching to NG at the moment.

    In addition, remember that this is a call for 2013. It isn't a call for 10 years down the road. These are three companies that I wouldn't want to be near in 2013 for the above listed reasons. Your bullish thesis may very well play out and *conceptually* it makes sense to target city mass transit now... but I don't see heavy trucking playing into its bottom line for at least a few more years.

    TMFUltraLong

  • Report this Comment On January 09, 2013, at 11:29 PM, TMFVelvetHammer wrote:

    Good stuff, Sean, and thanks for engaging in a conversation about this.

    Now we're getting somewhere!

    I can buy your argument re: trucking fleet age, as a limiter in the near term. I'm not sure if that will be how it plays out, and I'm betting on it not being a big problem. CLNE doesn't need an entre industry to shift, just a good percentage of new truck sales, and frankly it's a situation where the lack of infrastructure has throttled demand.

    The question is simple. CLNE is building it- will they come?

    You say "no" for now. I say "yes", and sooner than later, and I'm willing to wait if it doesn't happen as quickly as I expect. There is a pretty big tailwind behind "energy independence" and financial/economical ways to get there.

    There's a chance we will both be right, in the long-term

    Fool on!

  • Report this Comment On January 11, 2013, at 12:41 PM, sagg1948 wrote:

    I think you people from the fool are hypocrits in one breath you tout clne and then your commentator says avoid this stock you people remind me of Cramer. One week it buy this and the next we sold that is why I only listen to myself and refuse to sign with any of you. You are all two face.

  • Report this Comment On January 15, 2013, at 3:40 PM, samfoolcisco wrote:

    I think the idea that the long haul truck fleet is average 2-3 years old may not be key to switching (or not switching) to nat gas to save fuel costs. The engine is not the entire cost of a long haul truck. Swapping out a 3 year old engine (and selling it or trading it in) and replacing it with a fuel efficient Westport Nat Gas power plant might be a practical move. Do any Fools have figures on the costs for this kind of swap? I'm just askin'... I am long CLNE at the moment...

  • Report this Comment On January 17, 2013, at 11:35 AM, BanditFish wrote:

    I think the RIO for a engine running on NG versus an engine running on diesel is an easy calculation. The cost to change out an engine should also be easy to determine. I ready an article several months ago that the big play for NG engines due to NG distribution is in the garbage pickup and recycling sector. Most big companies own a large fleets of trucks and they all return to one central point. This makes refueling at one central point easy. I would think this sector would impact Cummins, Westport, and others. My questions are, how does CLNE play into this area. I saw an article today that stated they would be adding 150 station throughout the U.S. That is not very many, but I am assuming they are targeted for commercial usage. Also, can you answer my first question on ROI for engine change out.

  • Report this Comment On January 18, 2013, at 6:40 PM, TMFVelvetHammer wrote:

    buckhallen-

    I can address the second question:

    CLNE has beer working with "return to base" fleets (think garbage trucks and buses) for years, and that market has very high penetration in NatGas.

    The segment that has almost zero penetration is long-haul trucking, which, by the way, uses something like 2/3 of the diesel fuel burned in the U.S. So it's a massive opportunity.

    The two challenges are 1) no engines for the big trucks and 2) nowhere to get NatGas.

    Both of these are changing now, with WPRT, Cummins, et. al building the engines and CLNE and Shell building out the fueling infrastructure.

    Summary: Return-to-base fleets have been shifting to NG for years, but the real cherry is the long-haul, over the road trucks. And that's happening starting in 2013.

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