Don't say I didn't warn you.
Over two days in November, more than 150 companies in the United States, Canada and Mexico will find out what it's like to experience an electrical outage more massive than anything in our lifetime.
Scary proposition, huh? Well, it's actually a first-of-a-kind drill organized by the North American Electric Reliability Corp. to simulate an enemy attack that wipes out chunks of the power grid and leaves continentwide areas without electricity for weeks. It's attracting a virtual who's who of military, corporate, academic and utility personnel.
We already know how portions of the electric grid perform when severe storms strike. Eight million people in the Northeast lost power during Hurricane Sandy last year, making a disastrous situation that much worse.
However, the drill, set for Nov. 13-14, is unlikely to reveal anything that disproves what physicists, nuclear scientists, electrical engineers, utilities and the Department of Homeland Security, among others, have been warning of for years.
The U.S. grid is a century old. It consists of a patchwork of 450,000 miles of high-voltage transmission lines and 5,800 major power plants. The average substation transformer is two years older than its expected lifespan, and the entire system has had very little TLC along the way. As a result, American households and businesses lose an estimated $20 billion per year in direct losses of power.
The price tag to modernize the grid so it can withstand cyber-attacks, nuclear electromagnetic pulses, radio frequency weapons, solar storms, and Mother Nature's fury? An estimated $75 billion a year for 20 years.
Whether the U.S. takes a "Band-Aid" approach with the grid or tackles the whole shebang, quite a few companies that serve the electrical industry may be the recipients of lucrative, long-lasting paychecks -- especially those in the large power transformers (LPTs) business and smart grid technology. The power transformer and smart grid markets are both been forecast to reach $26 billion by 2018.
Here are three very different ways to profit from the U.S. investment in a next-generation electric grid.
|Goldfield Corp. (NYSE: GV)|
Goldfield, a $43 million company based in Melbourne, Fla., specializes in installing and maintaining electrical transmission lines for a wide range of U.S. utilities. After reporting a second-quarter loss in mid-August, investors punished shares, driving the stock down 46% in five trading days. Since hitting a year-low $1.47 on Aug. 21, GV has recovered 26%.
That recovery may have been a matter of investors reconsidering a company that had a great 2012 and beginning to 2013, largely due to the building of a 110-mile 345kV transmission line as part of a Competitive Renewable Energy Zone project in Texas. That project contributed about a third of Goldfield's 2012 revenue, which rose 68% to $53.2 million. After trading as high as $5.67 this year, GV looks like a bargain at under $2.
|AK Steel Holding (NYSE: AKS)|
The two main raw materials used to build power transformers are copper and electric steel. Six countries manufacture the specialized steel and provide 92% of U.S. supply: China, Germany, Japan, South Korea, Sweden and Taiwan. However, you might want to keep an eye on AK Steel, an Ohio-based company founded in 1899. AK Steel recently filed petitions charging that those six countries are unfairly pricing imports by "dumping" the excess in the U.S. at less than fair value.
The investigation is expected to take about a year, with final determinations of dumping, subsidization and injury to be made in the fall of 2014. Should action be taken against the foreign interests, AK Steel could gain a much larger market share at home. The $563 million company is set to report third-quarter earnings on Oct. 22.
|First Trust Nasdaq Clean Edge Smart Grid Infrastructure ETF (Nasdaq: GRID)|
GRID is a one-of-a-kind exchange-traded fund designed to track the grid and electric energy infrastructure sector. The 35 companies included in GRID are primarily involved in electric grid, electric meters and devices, networks, energy storage and management, and enabling software used by smart grid infrastructure sector.
Nearly 50% of its assets are allocated to industrials, with nearly a third going to technology and the remainder to utilities. The fund is dominated by U.S. stocks, which account for more than half of GRID's total assets. Other top country allocations include France, Switzerland, Spain and Italy.
Some of the top 10 holdings include ABB Ltd. (NYSE: ABB), Schneider Electric (SU.PA), Quanta Services (NYSE: PWR) and MYR Group (Nasdaq: MYRG). GRID is up 17% this year. Trading since November 2009, assets have only reached $11.8 million with average volume just over 24,000 shares a day.
Risks to Consider: All these investments are very small, which increases their potential volatility.
Actions to Take --> These three primarily red-white-and-blue options stand to profit as the U.S. infrastructure rebuilding projects take hold. The test on Nov. 13-14 could well get enough media attention to put the aging U.S. grid in the spotlight. Investors, in turn, may pour money into the sector.