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One True Bargain in This Market

February 22, 2011 – by Richard Band

As the market continues to make new recovery highs, there are few sectors with significant real value left. One of the few is the utility sector. So let’s talk utilities and utility stocks.

Frankly, the market’s straight-up rally since early December has me increasingly worried. It’s taking on more and more of the qualities of an irrational, dog-chasing-the-moving-car affair.

Corporate officers and directors (“insiders”) recognize what’s happening, and they’re jostling for the exits. The latest weekly reading from Vickers, a long-standing authority on the subject, shows that insiders dumped more than 10.5 shares of their own company stock for every share purchased.

That’s the highest sell/buy ratio I can ever recall seeing. In fact, until a month ago, I had never noted a sell/buy above 9:1. It’s even worse now. The people who know their own businesses best — far better than any Wall Street analyst — say that value has essentially evaporated.

With the market, in general, virtually begging for a smackdown, we want to be extra careful with new purchases. For us to part with our cash, value has to be obvious and compelling. Which brings us back to utility stocks.

Top Utility Stock to Buy – PG&E Corp. (NYSE: PCG)

Right now, most utilities, by my reckoning, merit a hold rating rather than a buy. However, a few offer more spark than the rest. One of my top stock picks in the sector is San Francisco-based PG&E Corp. (NYSE: PCG), which is a fully regulated electric-and-gas utility.

PCG posted year-end 2010 earnings Thursday morning, and it was basically a good report. For the year, operating profits jumped to a record $3.42 per share, up from $3.21 in 2009.

However, the company also disclosed that last year’s massive gas explosion in San Bruno, Calif. will trigger higher expenses in 2011 than PCG had foreseen. The midpoint of the utility’s estimates suggests that PCG will be laying out an additional $125 million on things like records validation and pipeline testing and inspection.

For a business with a total market value (debt plus equity) of $31 billion, that’s hardly a deal breaker. But any sort of surprise unnerves Wall Street, and the stock backtracked a little. Take advantage of the dip to buy PCG at $47 or less. This utility stock currently yields 4%.