The market was tough on balance the last two days. On Thursday, the Dow was up 33, and today it was down 70. On Thursday, the Nasdaq was up 13, and on today it was down 15. These are very choppy markets as we've written several times, including last Wednesday, when we Christened this period as stock Lent. No crazy investments, and no sporty speculations. We have about 40 days of this, until 2nd quarter earnings hopefully rescues us from this trendless market.

In keeping with our new found austerity, I will tell you about a fairly conservative investment that should produce returns of about 13%. Some of you have been looking for returns of double or triple that, which is very unrealistic, and can lead to substantial losses attendant with such possible gains. Even if you are searching for gains in the 15 - 20% range, my suggested investment may add some measure of portfolio stability that may permit you to take a greater risk elsewhere.

There is a proposed merger of two electric utilities that looks interesting. Utilities have been strong lately, as the 30 year Treasury Bond hovers around 5.8% On Thursday, the Dow Jones Utility Index was up 3.36 points, and on Friday it was up 3.87 points. This is great back to back performance, and may indicate good things to come for Electric Utilities in particular, as they are often viewed as a surrogate investment to bonds.

Sierra Pacific Resources (SRP) and Nevada Power (NVP), both Nevada based companies, have agreed to merge on an interesting basis. A shareholder of Nevada Power will choose to receive 1.00 share of the combined company's common stock, or $26.00 in cash per share. A shareholder of Sierra Pacific will choose to receive 1.44 shares of the combined company's common stock, or $37.55 in cash per share.

The merger should take place in about one year. The Nevada politicians apparently like this, as it is seen as making it more difficult for an out- of-state utility to take over one or both firms. The SEC and the shareholders have to approve it, which should be no problem. The most difficulty may be with the Federal Energy Commission, and even that is doubtful as this merger is small potatoes.

Sierra Pacific closed today at 34 5/16, up 5/8. With a quarterly dividend of $.325 per share, or $1.30 per year, and with a guaranteed gain in stock price of $3.2375 (37.55 - 34.3125), total return would be $4.5375 or 13.22%(4.5375/34.3125).

Nevada Power closed today at 23 7/8, up 9/16. With a quarterly dividend of $.40 per share for the next quarter and .25 for the following three quarters, or $1.15 per year, and with a guaranteed gain in stock price of $2.125 (26.00-23.875), total return would be $3.275 or 13.07% (3.275/23.875). Their directors have stated that after they consider the next .40 dividend, they plan to adopt a $1.00 annual rate to conform with the new company's expected dividend rate.

Of course, total return would be less any commission. Also, there is always some risk the deal won't go through. I would think such risk is slight, and the stock price seems to reflect too high a risk factor. The beauty of this deal is the cash alternative, and it sure makes calculating the return rate more accurate. If interest rates go up and bonds and electric utilities predictably go down in reaction, we have the cash alternative as the ideal bail-out and our approximate 13% rate of return. If interest rates go down, our rate of return should increase as utility stocks should have a price rise, and you would be better off taking stock in the new company.

If you don't own any electric utilities, this may be your opportunity to get in on an attractive basis. Utility stocks may ease off on Monday due to profit taking after the last two days' strong increase, but you will have to judge for yourself when you see Monday's action. I should note that I bought Nevada Power recently. At that time it offered the higher return, and that is the key factor when evaluating which stock to buy. A time will come when a 13% return gets the appreciation it deserves. Stay tuned.

The Market Pro - May 29, 1998