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By Travis Miller | 02-27-2015 11:00 AM

2 Utilities Stocks to Bookmark

The regulated-utilities sector is significantly overvalued after 2014's monster gains, but investors looking for exposure should keep an eye on Southern Company and Duke Energy.

Travis Miller: The regulated-utilities industry had a banner year in 2014. The group was up 31%, trouncing the S&P 500's 14% return and beating all other sectors. But this has led to the group being significantly overvalued at this point.

We think this group of about 30 regulated utilities are 11% overvalued. That was as high as 20% overvalued just a month ago before softening in February. But still, we think most of these stocks are overvalued and we highlight four, in particular, that are overvalued significantly.

Two gas utilities, Piedmont Natural Gas (PNY) and WGL Holdings (WGL): We like them as companies, but the valuations are out of hand, trading over 20 times P/E and well over book value. The other two that we think are overvalued are CMS Energy (CMS) and American Water Works (AWK). Both have premiums that we don't think are deserved, based on the long-term growth prospects.

We do think you should keep [an eye on] Southern Company (SO) and Duke Energy (DUK). Both are stalwart, longtime companies in very good regulatory jurisdictions [and yield over] 4%. They trade right around fair value right now; but if the sector were to take a downturn, we think there could be good buying opportunities with these two names.

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