TCS Daily

The Blackout Portfolio

By James K. Glassman - June 11, 2001 12:00 AM

There are some encouraging signs that energy prices are headed down during the next several months, and readers of this column know that Im an incorrigible optimist about the long-term health of the U.S. economy. Thats one reason why I think you should ignore quarterly economic data and tune out daily market news. The ups and downs will happen, and theres no need to react to each little hiccup in the economy. All you have to do is remember that stocks tend to appreciate and increase their dividends over time, buy a diverse group of stocks, and then leave them alone.

Still, I understand that many of you who may have cash to invest right now are feeling queasy about the economy. You know in your head that its foolish to try to time the market, but your gut tells you that the California energy situation will continue to hurt American companies, tech firms in particular. And make no mistake: As long as politicians like California Gov. Gray Davis not to mention many Democrats, whose party now controls the U.S. Senate -- continue to advocate price controls and government regulation instead of free markets, we could be in for a long, dark summer. So for those who need a reason to save and invest right now, Ive found three companies that might actually benefit from the blackouts.

The first one is American Power Conversion Corp. (APCC). You may have noticed a rectangular white box with a red APC logo somewhere on the floor of your office. It probably looks like a computer component but it actually sits between your computer and the electrical outlet. Its an uninterruptible power supply, or UPS, which gives you time to save your work, log out and safely turn off your computer in the event of a surge or a blackout.

American Power Conversion makes such power-protection products for home and small- business users and more industrial-strength energy management products for the largest corporations. At a time when more and more people are wondering if the juice will keep flowing, its hard to believe that there wont be robust demand for APCCs products. And this company doesnt need the fear of blackouts to look good. With a P/E ratio of 22 and average annual earnings growth of almost 18 percent over the last five years, American Power Conversion should do just fine, even if Gray Davis comes to his senses and averts the blackouts.

Now, lets really accentuate the negative for a moment. Lets say that power becomes a chronic problem for California businesses, that various groups block the construction of new power plants and infrastructure, and that increasing demand on the Western power grid creates continuing problems for neighboring states. If Im running a computer chip company in California and I cant get dependable power locally for my fabrication plants, I will probably take an even more serious look at hiring the Taiwanese to make my chips. Lots of Silicon Valley companies already outsource their manufacturing, and many of the semiconductor companies rely on a huge foundry called Taiwan Semiconductor Manufacturing (TSM) to make their chips. TSM, whose ADSs (American Depositary Shares) trade on the New York Stock Exchange, increased its sales 40 percent in the most recent quarter, but its price is down by half from its high, mainly because merger costs have hurt the bottom line. The company looks attractive as the manufacturing expenses in the U.S. rise.

Accentuating the positive now, lets say that the market responds to our increasing demand for energy, government expedites the granting of permits, environmentalists dont put up too many roadblocks, and lots of new power plants sprout up around the country. Who benefits from this boom in power plant construction? General Electric (GE) for one, because it has a huge power systems division. Actually, I usually grab any excuse to recommend GE, because I think its a wonderful stock for a long-term investor brilliantly managed, consistent in its growth and diversified across various industries. The fact that GE will get a lot of big-ticket orders as people create more power generating capacity is just one more reason to add this star performer to your portfolio.

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