Ever Short a Utility Stock?

The emotional investor in me wants to short the bejeezus out of FPL Group (NYSE:FPL). After Hurricane Katrina rendered my home powerless for six long, sweltering days, Hurricane Wilma has kept me in the dark for over a week now.

Again, that's the emotional me venting. I never let that Rick get anywhere near the "buy" or "sell" or "sell short" buttons. I realize that many of your best investments may have started out as emotional responses. Perhaps it was a sharp gut instinct after falling in love with a new gadget, technology, or upstart eatery. But that can be a dangerous practice if you don't have the fundamentals to lean against your initial convictions.

So let's take my displeasure a logical step further. Could an investor in the air-conditioned splendor of California or Hawaii find a good reason to bet against Florida Power & Light? Let's dig into the company's financials. Earnings barely dipped in 2004 but have come in lower in each of the first two quarters of 2005. We'll learn about the company's third quarter on Friday, as Wilma has delayed that report from its original scheduled release, which was intended for today.

Now, utility stocks are risky shorts because they typically pay out fat yields. Shorts are responsible for every quarterly distribution, even if that's balanced out by the stock's dip by an equal amount as it goes ex-dividend. FPL's 3.3% yield isn't much by utility stock standards, in part because the shares are trading at roughly 20 times earnings. That certainly isn't cheap, even before FPL made it personal.

However, another reason why utility stocks often aren't worth shorting is that the volatility just isn't there. Toiling away in a heavily regulated industry caps a utility's trading upside, but it also limits the downside. The last thing a speculator needs is to short a company that goes nowhere, with quarterly dividends dripping on your head like Chinese water torture (another utility stock, I imagine).

However, should the last two years of destructive hurricanes worry FPL investors? Meteorologists claim that this is just the start of an active storm cycle. When Hurricane Jeanne struck Florida last year, it was the fourth named storm to hit the peninsular state. You would have to go back to Texas in 1886 -- and I imagine most of you weren't there -- to find a single state hit by four hurricanes in one year.

Proving that 2004 was no fluke, Katrina, Rita, and Wilma have left their mark in 2005 as the storm season raced through the alphabet, leaving weather watchers brushing up on their Greek.

These storms have been costly to FPL in various ways. With no juice, the meters aren't spinning in the affected homes. Reparations are costly, as crews from 33 different states have been brought in to assist in the restoration efforts. Of course, FPL will be getting some national assistance in footing the bill, but that's not the point. The outages also play on the mettle of its 4.2 million customers.

The day before Wilma struck, FPL announced that it was better prepared to handle the expected outages. It had twice as long to gear up for the storm than the three to four days of advance notice that Katrina gave as it was heading our state's way two months earlier. Katrina knocked out power to 1.5 million FPL customers for as much as a week. The company was out doing preventative tree trimming around its power lines, and surely poles and transformers that were either repaired or replaced would hold up better after Katrina had weeded out the weak links over the summer.

No such luck. A record 3.2 million customers, about 75% of FPL's clients, were rendered juiceless. That doesn't mean 3.2 million people. That means 3.2 million accounts. And considering that many, if not most, accounts are held by households of more than one person, or businesses, we're talking a lot more than 3.2 million people affected by this.

Take a look at these figures on how recent hurricanes have affected power to stricken areas.

It took FPL a week to get all of its accounts up and running after Katrina, but now -- a week after Wilma -- FPL still had 834,000 families and companies without power restored. The timeline for total restoration to the area is now as long as four weeks.

If you're an aspiring South Florida politician, you'll be a shoo-in if you run on an anti-FPL platform. The same kind of hurricane reform that mandated stronger building codes after Andrew is likely to bleed over to FPL. It won't be long before counties demand more hurricane-resistant exposed utility structures. It just seems hypocritical that you do your best to batten down the hatches of your own property for the storm and come through it relatively unscathed, only to find yourself snaking through long lines for gasoline, water, and ice for weeks because FPL let down the community.

If you're not catching on to that kind of anti-FPL fervor in the news or out in cyberspace, trust me -- that venom is being dispensed from inked quills under kerosene lanterns. In the end, reform will either happen (and it won't come cheap), or the public outcry for alternatives will loosen FPL's grip.

There are the logical hurricane plays. Hardware superstores like Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) usually produce healthy results during destructive hurricane seasons as customers load up on plywood, power generators, and items like batteries, gas-powered grills, and camp gear. You also have the companies that aim to protect homes with everything from aluminum shutters to 3M (NYSE:MMM) and its window coatings to help glass windows sustain the impact of weaker-category hurricanes.

After that, you have the homebuilders and infrastructure plays to get a ravaged town back in order. However, there may be a new wave of hurricane plays here. Companies like Plug Power (NASDAQ:PLUG) and Fuel Cell Energy (NASDAQ:FCEL) that produce industrial-sized gas-powered generators have been marketed mostly to companies, but their usage may bleed over into the residential market now that frustrated homebuilders are fed up with the perpetual electrical outages that seem to only grow more frequent and pronounced.

An investment in the low five figures may seem like a lot, but the areas that are usually out of power for the longest time are the tree-lined upscale neighborhoods. The notion of kicking FPL to the curb, or at least backing up the electrical power with a secondary source that can power the entire home during a prolonged outage, may pick up momentum with every savage storm.

FPL has been a bulwark to some income-minded investors. The company has been paying out dividends for 59 straight years. It has hiked its payout six times over the past five years. However, with short-term interest rates rising even higher, I can yield as much out of my eBay (NASDAQ:EBAY) PayPal money market account than I can through FPL shares.

Earnings growth will be tested. Customer dissatisfaction will sting the company. OK, I'm not brave enough to short FPL. Things like a bag of ice or a gallon of fuel seem like more compelling pursuits these days than ferreting out an online connection to initiate the practice of borrowing shares to sell them short. As a member of the Rule Breakers newsletter team, I'm more interested in digging deeper into alternative energy stocks that may come to replace FPL's grasp on the state.

Yes, I do see cracks in the FPL story. If earnings continue to weaken and the dividend hikes fade away, income investors will find more attractive alternatives in fixed income investments and growing utility companies.

FPL, beware. Another storm is coming.

Home Depot and 3M are Motley Fool Inside Value picks. eBay is a Motley Fool Stock Advisor pick.

Longtime Fool contributor Rick Munarriz may be a dissatisfied FPL customer, but he has nothing but respect for the brave technicians who will restore power to his neighborhood one of these days. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.