A confluence of fundamental and valuation worries sent utility stocks to five-year lows on Wednesday.

The selloff came one day after a severe earnings warning from

PNM Resources

(PNM) - Get Report

, a seller of electricity and natural gas in New Mexico. Subsequent downgrades of

Pinnacle West Capital

(PNW) - Get Report


Duke Energy


aggravated the group's performance further on Wednesday.

The Dow Jones Utilities Index was off 4.7%, while the

Dow Jones Industrial Average

was down 2%.

"Part of the selloff is stock market related," said John Olson, an analyst at Sanders Morris Harris Group, a securities firm in Houston. "But it's also an attack on the more expensive utilities out there." Prudential cut Duke Energy's price target, for example, on Wednesday, after reassessing its valuation.

In late 2000 and early 2001, while the


was crumbling, humdrum utility stocks became a scintillating option. But now -- after


bankruptcy, liquidity crises at major energy firms, overcapacity and weak wholesale energy prices -- the group's performance has fallen back to earth.

PNM Resources drastically reduced its earnings forecast for 2002 from a range of $2.65 to $2.85 a share to a range of $1.90 to $2.10 a share, as a result of low wholesale energy prices and a decrease in trading activity.

"PNM Resources' sizeable earnings warning last night was another warnings of weak western power markets," said Steven Fleishman, an analyst at Merrill Lynch, in a research note on Wednesday.

In response to PNM Resources' move, Fleishman reduced his rating on the stock to neutral from buy on Wednesday. The analyst also lowered his recommendation on Pinnacle West to neutral from buy.

Nearly 50% of Pinnacle West's 2001 earnings came from energy trading and marketing. These days, amid concerns about the risk of the activity, a reliance on trading has been a sore spot for the industry.

Another problem for the group is overcapacity, following years of buildups across the country. Analysts are expecting 40,000 to 45,000 megawatts of new capacity to come on stream this year.

"Across the country, companies have been overbuilding power generation units," said Mike Hiley, a futures broker at ABN Amro. "Now, even when the weather gets hot, prices do not respond."

The bright light in an otherwise dim scenario is that some think utilities are approaching bargain levels. "Based on our model, utilities are back on sale," said Robert Strauss, assistant portfolio manager of the Icon Telecommunications and Utilities Fund, which is still down about 9.2% for the year.