When you consider a stock in the utilities sector of the market, I’m sure you are thinking about safety and income, not so much about over-sized gains. As a rule of thumb, these big players won’t be outperforming in a bull market… but in today’s uncertainty, why not trust an established utilities contractor with locked-in contracts?

What makes utilities companies so much different from your typical stock is in the way they are regulated. They are essentially allowed to hold monopolies in a free market system, which makes for a big advantage in troubled times. The problem now seems to be with federal interference. The U.S. Energy bill signed back in December of 2007 has really struck a chord with bitter utilities companies, and they sometimes struggle to expand in hard times. Regardless, we like the hedged exposure many have to oil and natural gas markets . Let’s pick up some great utilities stocks!

Electric Utilities – Exelon (NYSE: EXC)
If you are going to own an electrical utility company, I think the one for you is Exelon. Electrical companies like Exelon, despite the recent energy bill, may soon find themselves in the spotlight if legislature restricting carbon emissions progresses further. Most analysts covering the stock will tell you that the firm is undervalued with respects to their potential upside from such a move. I give you a price target of $88.20 versus their current trading under $80, but I think you can grab them closer to $75 .

Other than carbon emission speculation, EXC has a lot more going for them. Commodity prices for coal and gas have improved after increased profitability at nuclear plants. Also, Exelon has seen better than expected capacity prices at its big Chicago plant. These guys really haven’t fallen off the map as their competitors have, down just over 2% on the year (and enjoying a 2.7% dividend yield!).

What exactly does Exelon do? Well for starters, they are known for being the premier provider of nuclear energy in the U.S. People are turning to nuclear technology in order to save themselves from the increasing expenses in gas and coal, and EXC is sitting back with a grin . Bottom line: These guys are too cheap, despite not getting hit this year. Try Exelon for some solid growth in 2008.

Industrial Utilities and Power – PPL Corp. (NYSE: PPL)
Deutsche Bank says PPL is “sitting pretty within the diversified utilites.” Clearly, there is no arguing this case. Catching them around $45 where they are now is a steal on this domestic utilities powerhouse that I set a 12-month target at $60. They have been brought down somewhat unfairly by the broader economy, despite putting out earnings that beat expectations and slightly bumping guidance into the future . I think that people fail to realize that power is generally more resistant to the market than is currently implied.

PPL’s exposure to a tightening power market is definitely a good thing for business. They have systematically generated some risk-adjusted returns for shareholders, and are really taking every expansion, sale and upgrade in the most cautious light as possible.. which has turned out to be a huge advantage. They are working on expanding their nuclear plants (like that in Susquehanna), and have been flying under the radar for too long. You need to keep a keen eye on PPL with constant barrages of political contracts, but its hard to mess with a 2.90% dividend yield, a beta under 0.5, double-digit margin growth and returns above the industry across the board .

Water Utilities – SABESP (NYSE: SBS)
If I had to go one place in 2008 for stock market success, it would be Brazil. So why not take one of the safest plays (utilities stock) in one of the fastest growing markets? Companhia de Saneamento Basico do Estado de Sao Paulo (whew… I’ll just call ‘em SABESP again ) is just the international player we want in a diversified portfolio. SBS is a sewage company. To put it simply, a thriving economy like Brazil is going to leave a lot of sewage behind… and SBS basically has their work cut out for them. It’s really that simple!

These guys are winners. Plain and simple. Down just 0.7% for the year (I consider that a win), they have really been waiting to break back into their classic upswing. SABESP provides water to more than 25 million people in 367 Brazilian cities, and they are DIRT CHEAP compared to their peers. I mean c’mon… a P/E of 0.7 versus an industry 22.66?! Get out of here . If you can bring me a company that is international, undervalued (like nuts), carries a 53.57% gross margin and hasn’t been killed in 2008 as of yet… more power to you. I’m sticking with the utility with the long name, SBS .

Electric and Gas Utilities – MDU Resources Group (NYSE: MDU)
Montana-Dakota Utilities should be a buy on everyones list. They’ve won the hearts of Wall Street investors (10 buys, 1 hold, 0 sells)… now let them win yours! If you are interested in catching some of the Natural Gas & Oil action, MDU has a safe correlation to the commodities. Their operations in Natural Gas & Oil, Electric & Gas, Construction Services and Pipeline & Energy came in higher than expected, with their laggards found in the construction materials & mining segment. I see nat gas & oil alone driving earnings beyond their low-end guidance in 2008, but they could be hurt by residential construction. You should still be buying them, but just with a more cautious eye.

MDU Resources Grp. ended 2007 on a high note, and have taken a hit in 2008. However, they have continued to surpass earnings expectations and I feel that they will recover their losses in the short term and continue to impress in the long term. With a number of key acquisitions that have just been completed, MDU has taken their lumps and is ready to perform. The stock price continues to intrigue me at $25 versus my target set at $33. I think that following the economic stimulus plan, you can expect for lots of money to be thrown at previously unappreciated old-timer public works projects like those found under MDU. They haven’t ignored the strong pull of “green technology,” and really seem ready to break from an unfortunate downtrend. Consider them in your research.

That’s a wrap for the utilities sector. These stocks can add a huge layer of safety to any investment portfolio. While they might not have much in the way of sex-appeal, in a recession… you need some trustworthy under-the-radar successes like EXC, PPL, SBS and MDU. You need to be careful that you don’t catch them in the middle of a legislative disputes (happen somewhat often in the industry), so remember to do your homework.. and invest smart!

-Jimvesting