Have you checked the thermometer lately? Here in Washington, D.C. it's a wintry 34 degrees and in other parts of the country like North Dakota it's well below zero. With the weather below average in much of the northeast and the Farmers' Almanac calling for a "numbing" winter in two-thirds of the country, consumers are bracing themselves for what could be a costly winter.

While consumers are dreading the cold weather, utilities are seeing dollar signs, as people begrudgingly turn up the heat. So, why not turn the tables around and put some of that money back in your pocket?

Gas utilities in particular should serve as a good investment during this financial blackout. Many of the newer homes constructed during the past housing boom are built to use natural gas. Also, heating homes with natural gas is less expensive than electricity, and unlike oil, the U.S. has large reserves of natural gas. Additionally, natural gas utilities have been able to increase prices across the country in recent years as a result of greater pricing power.

Bear market's wrath presents investing opportunity
Valuations look enticing here. Utilities are typically a good sector to be invested in during a bear market. They usually don't see a slow down in cash inflows during economic downturns, as people still have to pay their electric bills. As a result, utility stocks typically hold up well through a bear market ... except maybe this time. The sector actually hasn't weathered the bear market as well as past downturns. Year-to-date, the Dow Jones Utility Average is down an astonishing 32%, while the Dow itself is down 33%, merely one point more. Given the apparent unjust sell off, this actually presents an opportunity for investors to buy utility stocks, as valuations are likely more attractive. When you find a company with strong fundamentals that's mispriced, then you have found real value.

Companies like retail propane distributor Amerigas Partners (NYSE:APU) and Brazilin utility CPFL Energia (NYSE:CPL), for example, may not be properly priced for the value they offer.

To uncover strong, undervalued utility stocks I used the Motley Fool's CAPS screening tool to search for companies with:

  • CAPS ratings of four or five stars, the highest two ratings from our CAPS community -- during the first 20 months for which we have data, four-and-five-star companies have outperformed the market, with average annualized gains of 7% and 12% respectively.
  • Trailing dividend yields of 3% or more.
  • Return on equity of 15% or greater, to measure the utility's efficiency.
  • Price-to-earnings of 14 or less for lower valuations.
  • Market caps of $500 million or greater.

Here are six of the 12 companies to pass the above screen when I ran it today:

Company

Market Cap (billions)

CAPS Rating

Current Dividend Yield

Return on Equity (TTM)

Price-to-Earnings (TTM)

Amerigas Partners

$1.6

*****

9.4%

63.9%

10.1

CPFL Energia

$6.5

*****

13.5%

27.6%

8.4

ONEOK (NYSE:OKE)

$3.0

*****

5.6%

16.8%

8.8

Exelon (NYSE:EXC)

$34.9

****

4%

26.2%

13.5

PPL (NYSE:PPL)

$11.1

****

4.5%

19.6%

10.5

National Grid (NYSE:NGG)

$24

*****

6.1%

23.4%

13.58

However, before you start doing the electric slide to the tune of better returns, remember that the screener should only be the first step in your investment research. Look for utilities that are diversified, have strong cash flows, a solid dividend yield, and a bright future.

Start boogying and gas up your portfolio at Motley Fool CAPS today! Let the collective wisdom of our 120,000 member-strong investment community help you find those companies to bolster your portfolio.

For more Foolishness on utilities:

Jennifer Schonberger does not own shares of any of the companies mentioned in this article. National Grid and ONEOK are Motley Fool Income Investor recommendations. The Motley Fool has a disclosure policy.