The sweltering record heat in the Northeast has brought up fears of heat stroke and other related illnesses. But there is another fear that may be even more serious - the possible failure of the country's power grid as temperatures rise.
On July 6, the electricity demand in the East hit levels not seen since the summer of 2006 and for the most part, the power grid held up well. The fact there have not been any major blackouts along the East Coast could be attributed to billions spent by the power grid companies over the last decade to prepare for higher demand. The question is whether what they have done is enough. The short answer, in my opinion, is no - more upgrades are likely to be required. The good news is, this could mean opportunity for investors.
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All-In-One Grid Investment
If investors want to gain exposure to the entire power grid sector, one of the best choices is the First Trust NASDAQ Clean Edge Smart Grid Infrastructure ETF (Nasdaq:GRID). The ETF invests in U.S. and foreign stocks that are primarily engaged in electric grids, metering and devices, energy storage and management, and technology used by the energy grid sector.
The individual stocks that will be highlighted below are all components of the ETF, which is composed of a total of 32 stocks. Each stock must have a market cap of at least $100 million and a minimum three-month average daily dollar trading volume of $500,000. This helps eliminate any penny stocks from consideration and lowers the overall risk of the ETF. The ETF began trading in November 2009 and after a brief rally it has struggled through a downtrend, but with good support near $26 it could be close to a new buying opportunity.
Quanta Services (NYSE:PWR) is the No.4 holding in the ETF and is considered an infrastructure play in the power grid sector. The company can upgrade, install, repair and give regular maintenance to power grids of all types as well as alternative energy facilities such as wind and solar. Technically, the stock has held up better than the overall market with strong support at the $20 area. Fundamentally, the stock is not overly attractive with a forward P/E ratio of 16.8 and a PEG ratio of 1.3.
EnerNOC (Nasdaq:ENOC) is an energy management firm that offers services that are sought after when energy demand increases. By monitoring the levels of energy needed, ENOC is able to help the companies demanding the energy as well as the utilities through the cycles of energy needed. Technically, the stock has been a leader in the difficult market, hitting a fresh four-month high in early July as the indexes approached multi-month lows.
Power-One (Nasdaq:PWER) manufactures power conversion devices and power management solutions for the renewable energy and communications sectors. One of its products converts energy generated from wind or solar into usable grid power that can be used in residential and commercial settings. The stock has been on a tear in 2010, up 75% through the first week of July. With a forward P/E ratio of 15.85 and a PEG ratio of 0.59 it appears the stock still has more room to run. A breakout above $8.50 would represent a major buy signal. (For more, see Move Over P/E, Make Way For The PEG.)
SatCon Technology (Nasdaq:SATC) is the smallest stock in the article, a true micro-cap stock with a market cap of only $211 million. The company is similar to PWER in that it offers products that help convert power generated from renewable energy sources into usable energy on today's power grids. The company has yet to make money, but First Call estimates a profit of 10 cents per share in 2011 and close to 40 cents in 2012. The high growth potential makes the low-priced, speculative stock one worth gambling on.
The Bottom Line
The low-risk approach to playing the power grid sector is through an ETF, thanks to the instant diversification it offers. If, on the other hand, you are an investor who does not mind the risk of individual stocks, the four stocks examined here are worth a closer look. (For more, see 5 Ways To Find A Winning ETF.)
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