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Tickers in this Article: AWK, MSEX, YORW, ARTNA
It was a bit of a long drought, but water utility stocks, as a group, have finally started to move upstream again, and they're likely to continue doing so as the summer doldrums kick in. Here are four 'picks of the litter' to review, but first things first.
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Bigger Picture
Water stocks may not be 'sexy' by anybody's definition of the word, but gains created by rising stocks are certainly a lot sexier than losses. On that note, the S&P 1500 Water Utility Index has fulfilled one of my personal requirements – bullish momentum – by putting up a 9.0% gain last month. It also looks like it's still headed upward. The S&P 1500 barely budged at all last month, and appears to be pointed lower.

Some of these stocks look unusually expensive, considering they're utility stocks and aren't exposed to a lot of growth potential. That's a nice way of saying even though the group, looks good, the several individual stocks in the group don't.

Nevertheless, the industry benchmark averages we should be using as a yardstick are a price-to-earnings ratio of 11.5, an operating margin of 23.5% and net margins of 7.2%. If you're into dividends, this is surprisingly an industry you might not care for - the average dividend yield is 1.1%.

OK, all set for the names? One last caveat – these four picks don't necessarily beat the industry's averages on all the key criteria, though most of them are topped. (For a background reading, see The Industry Handbook: The Utilities Industry.)

Best of the Best
The American Water Works Co. Inc (NYSE:AWK) loss last quarter, which more than offset the gains created over the prior three quarters, and that's is a tough pill to swallow. You've got to look at the bigger picture though. Had it not been for a $450 million impairment charge, the $413 loss would have actually been a $37 million profit, which is in line with the normal quarter.

If the analysts are right and American Water earns $1.32 per share this year and $1.44 per share next year, the projected 2010 P/E is a reasonable 12.7.

York Water Co. (Nasdaq:YORW) may seem a tad on the pricey side (and it is), but the company is consistently cranking out net margins around 20%. It's worth it to pay up for a little profit cushion. Getting into the Russell 3000 recently doesn't hurt the stock's stature either.

There's nothing excessively special about Artesian Resources Corp. (Nasdaq:ARTNA) other than its size. It's just a micro cap (market cap of $122.5 million), and a smaller company that can perform as well as (or better than) their bigger competition. ARTNA's price multiple of 17.4 may feel a little rich, but what you're paying a little extra for is the dividend, usually in the 3.3% to 4.3% range.

And finally, think about Middlesex Water Co. (Nasdaq:MSEX).

Middlesex got a lot of investors' attention more for technical reasons than fundamental ones. How so? Since late 2007, shares have fallen from around $18 to a March 2009 low around $12. Since March though, we've seen incrementally higher lows, and some real pressure to make higher highs.

The Bottom Line
Though the value of non-cyclical and utility stocks rarely changes, perceptions do. Therefore, even the prices of non-cyclical and utility stocks can change dramatically over time.

We may be entering a 'flight to quality' phase. Stocks are broadly overbought, and it doesn't look like the economic recovery is taking hold as firmly as many investors were expecting. It's the kind of environment in which investors make exits on aggressive stocks and hunt for more conservative ones, like water utility names.

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