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Stock Performance Makes Utilities Sexy

David MacDougall

In the trash heap that is the stock market, one industry stands apart: utilities.

Utility companies make up the most attractive sector by far, according to TheStreet.com Ratings' proprietary quantitative model, which takes a "safety-first" approach. In terms of points awarded by the model, utilities get 4.54 on a scale of one to 10, with the next closest industry, consumer staples, almost a full point behind.

Even more appealing is the rate of change in those points over the past year. As industrials, materials and energy shares plummeted by 18%, 17%, and 18.75% in October, respectively, utilities declined just 9.4%. That has opened the quality gap between those industries, highlighting utilities as the most stable sector.

A Comparison of All Industries Far and Away the Leader TheStreet.com Ratings

Drilling down, we can find the sub-industries that have outperformed others within utilities: electric, gas and multi-utilities. Upon further investigation, it turns out that those are higher in overall points than all but one: industrial professional services, which has only a handful of "buy"-rated companies. The utility industry as a whole, on the other hand, features 37 "buy"-rated stocks and only six "sells."

Sub-Sector Breakdown Focusing on the Niches TheStreet.com Ratings

There are downsides to investing in utilities. The eventual market rebound probably will see these stocks rising more slowly than volatile sectors like technology. Also, profits remain tied to government regulations, so political decisions could erode margins.

Still, utilities are worth considering. The best companies within the utilities sub-industries are New Jersey Resources(NJR), NSTAR(NST) and Xcel Energy(XEL).

New Jersey Resources rates the highest. The company deals in natural gas distribution in retail and wholesale markets. Over the past year, the company's stock has been blissfully immune to the market meltdown, with a beta value of 0.21. (One is a perfect correlation.) As the S&P 500 declined 44.9% over the past year, NJR has risen 8.5%, which makes the company sexy where it counts. With a dividend yield of 3.5% and an A grade from our model, this looks like a winner.

NSTAR, rated "buy," operates in energy distribution and transmission throughout Massachusetts. With an operating margin of 15.8% and a return on equity of 13.6%, the company is another stable standout. Over the past year, NST has risen 1.8%, outperforming the S&P 500 by 46.7 percentage points. The 4.7% dividend yield is an added benefit.

A third stock in this sector, also rated "buy," is Xcel Energy. The company is forward-looking, displayed in its investment in smart-grid technology and solar power. Xcel may benefit from federal stimulus dollars. And the dividend yield is a massive 5.4%.

TheStreet.com Ratings' model rewards stability and consistency over other attributes. In such volatile and uncertain times, the ratings generated by this approach to investing can be valuable. Using a top-down approach with safety-first criteria can lead to improved performance in shaky times.