Which sector of the equity market offers a high level of current dividend income, operates in a unique environment that allows its participants to earn back their cost of capital plus make a profit, has almost no exposure to Europe, operates in an industry with very high barriers to entry and yet has underperformed the broader market by about ten percent so far this year?If you guessed the electric utility sector you are correct!Investors celebrated better economic news in recent days sending equity markets to new highs across the globe. While those who had the fortitude to stay put in their long term capital growth strategies or even opportunistically buy the market dips are happy campers, some investors are still sitting on the sidelines with large amounts of cash and may be having an increasingly difficult time finding value.For those not willing to sit in low yielding bank deposits while waiting for another dramatic market correction, the North American electric utility sector may be offering good value right now for patient investors. As of this writing, the electric utilities have been left behind in this year’s sharp stock market rally, falling by 2.4 percent as measured by the MSCI Utility Index versus an 8.5 percent increase in the S&P 500 index.Recently, electric utility stock prices have lagged the broader stock market mainly in reaction to lower electricity demand and falling wholesale prices as a result of record warm weather across much of the US.Many states are seeing some of the highest temperatures for this time of year in decades. Adding to the underperformance of utility stock prices, mutual fund flows have lately favoured riskier assets including those exposed to more economically sensitive industries and emerging markets as fears of a ‘double-dip’ American recession abate.However, in Bermuda we are well aware that climate changes can be both abrupt and dramatic. Statistically, seasonal temperatures tend to even out over time and electricity demand growth generally manages to advance in-line with the overall growth rate of the broader economy.Buying strong companies which are out of a favour for a time has historically proven to be a profitable strategy.Another phenomenon shaking the foundation of the energy business is a trend towards using increasing amounts of natural gas sourced from more effective shale gas drilling in North America.While spot crude oil is hitting new highs each day on renewed Mideast tensions, natural gas prices are falling to decade lows. As of this writing, natural gas prices are trading at a 10-year low due to steady inventory building in America and the record warm winter weather.Gas inventories have now risen to 24 percent above their five-year average while inventory withdrawals are running nearly 30 percent or 400 billion cubic feet below average according to a recent US Energy Information Administration report.The warm weather is bad for electricity prices and volume but good for expense containment as the input cost of the basic raw materials decline. In addition to saving on costs, many larger electricity generators have the ability to switch from coal or oil to gas.In fact, some companies including Duke Energy, a large North Carolina-based power generator, have made the decision to shut down coal fired plants which have become increasingly expensive to operate under new environmental standards soon to be implemented by the Environmental Protection Agency (EPA).Running on natural gas provides utilities with both a lower cost structure and an improved environmental impact profile. Studies have shown that burning natural gas for electrical generating capacity allows up to a 70 percent reduction in greenhouse gas emissions over coal.Furthermore, the US produces nearly 21 trillion cubic feet of natural gas annually, according to the US. Department of Energy (DoE) with estimated proven reserves of natural gas of at least 2,632 trillion cubic feet.Leading economist, Anthony Boeckh, PhD who presented at this year’s CFA Institute Forecast Dinner in Bermuda emphasised the fact that increasing reserves from shale extraction within North America is already significantly boosting natural gas production in the United States.What we have seen lately may just be the beginning of a sweeping change which could ultimately make America much less dependent upon volatile foreign energy sources. Generation and transmission companies which are positioned in front of this secular trend stand to benefit.Employing quantitative discipline also adds value in security selection. Our historical studies show that electric utility companies which are trading below the group median valuation level (as measure by the price-earnings ratio) and possess above-sector-average dividend yields outperform over most time periods.For example, over the past three years ending December 2011 (12 quarters) publicly-traded electric utilities trading at cheaper relative valuations than their peers and offering above-average dividends versus the sector median at the beginning of each quarter outperformed the utility sector total return by approximately six percent per year and exceed the return on S&P 500 by over 3 percent annually.The total return on these pre-screened utilities over the past three years was 66.5 percent versus a gain of 48.5 percent for the S&P 500. Not bad for a stodgy industry!Bryan Dooley, CFA is a portfolio manager at LOM Asset Management in Bermuda specialising in the areas of portfolio management, investment strategy and quantitative process.This article is for information purposes only and is not investment or financial product advice and is not intended to be used as the basis for making an investment decision. The information has been compiled from sources believed to be reliable however Lines Overseas Management Limited nor any of its affiliates or representatives makes no representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information, opinions and conclusions contained herein.