Will utilities at last see a payoff in telecom investments?

While the price of stock in TNP Enterprises shot up 40 percent in the year ended Feb. 17, Western Resources saw its valuation drop by about the same proportion during that period. Montana Power's stock price climbed 72 percent, while that of NiSource plunged 35 percent.

What accounts for such drastic changes? According to Zach Wagner, energy analyst at Edward Jones, two major trends are evident: merger activity and diversification into telecommunications.

"If you look at a 52-week change in the prices of utility stock, those [companies] being acquired are generally up a lot, and those [that] haven't been acquired are usually in negative numbers," says Wagner.

"The other trend I would point out is the telecom trend that's kind of sweeping through the industry," he notes. "Telecom is valued much higher by Wall Street in today's market than a traditional utility." Wagner credits that trend for the increased valuations of companies that have successfully moved into telecom, such as Montana Power, Williams, and Enron.

In fact, these trends may be part of why the investment pendulum has finally swung back to Old Economy stocks - at least for the near term.

"There is some money moving back into the traditional utility stock because investors are seeing volatility on the NASDAQ and are realizing that they may be taking too much risk in investing in some of these technology companies," Wagner explains. "It's really a trend of investor sentiment."

Part of the reason for this shift is that investors are recognizing the value of energy stocks, he says.

"I think utility stocks just got to the point where they were so cheap, they were hard to ignore." With average dividend yields around 6 percent, adds Wagner, "we just saw a lot of investors ... recognize they could get a lot for their money with utilities."

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