ETF Teardown: The Best Utility Stocks

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool. ETFs hold a collection of stocks that share certain elements, so if investors want to capitalize on the increasing demand for basic utilities, for example, they can turn to Utilities Select Sector SPDR (AMEX:XLU), which invests in a basket of diversified utility stocks.

But since Utilities Select Sector invests in a number of stocks, it gives investors a broad diversity that also limits their upside. For an investor who was, say, really hip to electric utility companies but cold on the prospects of gas or water utility stocks, this ETF wouldn't fit the bill.

Fear not, Fool -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best of what the utility sector has to offer. To help, we'll use Motley Fool CAPS, our tool for screening and ranking stocks and stock pickers.

The power of tags
To help investors quickly locate great stocks, any of the 4,700 rated stocks that are profiled in CAPS can be "tagged" with a descriptor that groups the company with others that share a certain quality.

The utility sector is quite diverse, so there are a number of related tags in CAPS to choose from, including "Electric Utilities," "Water Utilities," and even "Foreign Utilities." For investors favoring electricity, the "Electric Utilities" tag in CAPS presents a list of 55 investments that trade on American exchanges. This particular collection of investments has risen 27.4% in the past year, topping the 21% gain in the S&P over the same time.

To get a sense of which companies the CAPS community thinks are the best utility opportunities today -- and which ones they recommend staying away from -- we can sort this list by their CAPS star rank, denoted by one to five stars, with five being the best. Each of the individual companies can then be viewed for exactly who -- from Wall Street to Main Street -- is bullish or bearish on the company and why.

Getting down to the nitty-gritty
Here's a sampling of some of the favored -- and not-so-favored -- electric utility stocks our screen pulled up today.

Topping our list of electrically stimulating companies is Brazilian firm COPEL, or Companhia Paranaense de Energia. (Say that three times fast!) The company generates and distributes electricity primarily in Parana, Brazil, where it serves more than 3.3 million customers. Demand for power in the residential market grew by 5.7% in the most recent quarter, and commercial consumption was up 6.4%. Thanks to falling costs and increased profits, the stock has risen more than 70% already this year, but investors still have the company in the bargain bin, with a low price-to-earnings ratio of 6.8 and a dividend to boot. Citing strong cash flows and a reasonable valuation, more than 98% of CAPS All-Stars believe COPEL will continue to beat the market in the future.

A more diversified utilities company that CAPS investors favor is Motley Fool Income Investor selection Duke Energy. The company mainly operates franchised gas and electric services in several eastern states but also has operations in several Central and South American countries. A generous dividend payer that has maintained a yield of approximately 4% over the past few years, the company spun off its natural gas transmission business, Spectra Energy (NYSE:SE), at the beginning of this year. Many CAPS investors think the company is priced below its future growth prospects -- indeed, 612 out of 641 investors rating the stock are bullish about the company.

Shockingly, though, some energy concerns do little to tingle investors. One example is energy technology company Evergreen Energy, which has developed a process to refine coal into cleaner energy. The company has burned through hundreds of millions of dollars in developing its technology, and CAPS investors are still largely skeptical on its prospects. Indeed, more than 87% of CAPS All-Stars believe the company will continue to lag the S&P going forward.

You can lead a horse to water ...
Plucking individual stocks from the diverse utility sector is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than take a recommendation. After all, even the best stock pickers can be horribly wrong on a stock.

So, do you agree that electric utilities are still the best places to invest? Or are alternative-energy plays just misunderstood? Give your own opinion at Motley Fool CAPS.

Duke Energy is one of many high yield-stocks recommended in the Motley Fool Income Investor service. To learn more about companies that will pay you to hold shares, check out a free 30-day trial of the service.  

Fool contributor Dave Mock loves doing the teardown part -- it's the put-back-together thing he hates. He owns no shares of companies mentioned here. Duke Energy and Spectra Energy are Income Investor recommendations. Dave is the author of The Qualcomm Equation. The Fool has a disclosure policy.