Utility Stocks – Some say buy, we say beware

        

Earning Channel

 

Came across an article suggesting utility stocks, we think it is necessary to look into this matter more seriously, and not to mislead conservative investors.

Summary

  • Who buy utility stocks? The conservatives, the retirees.
  • Why buy utility stocks? Mainly, for steady dividends.
  • What to do now? How to do it?

The prices of utility stocks are often the last to rise. It is unlikely for their earnings to have strong growth. So, when the prices increased, it is often due to the increase of the P/E ratio.

Why the P/E of this sector increase? Two reasons:

  1. Greed

The whole market’s P/E has increased. People feel “this time is different” again. Many stocks have gained so much. Shouldn’t it be safer to buy those that have gained less?

  1. Fear

The inflation is going up and staying up. So, there is less to buy with the same amount of money. If I don’t buy now, I’ll become poorer.

The fact, weaker stocks rise last and often fall first.

Like many successful investors have told us, always ask yourself why you buy and own the stock? For utility stocks, if it is not for the dividend, what then? So, when the capital gain is sufficient, you should take the profit and go away until the price (the P/E) drops back to the long-term norm.

Mr. Tepper gave a good summary on the stocks that lagged in the recent stock surge, in “This Chart Shows the Biggest Stock-Market Losers Under Trump. You Should Buy Them Anyway”

http://time.com/money/4697361/out-of-favor-stock-market-picks/

Mr. Tepper pointed out

“That year (2016) utility stocks soared 16%.”

“The sector is trading at a 20% premium to its historical average, according to FactSet. ”

Now let’s do some simple math:

Since the utility sector is quite stable, when there is a major correction, it will not fall too hard either, but having some undershoot is normal in crisis. So, with a capital gain of 20%, we expect some people (the conservative guys) will sell at 25%~30% below the current price when the major correction occurs.

We don’t know when the correction will come, but it will come. Since we know that there are more than 940 stocks/ETFs grew more than 5 folds, and 120 of them more than 20 folds, from the low of 2008. In addition, many of these stocks do not have positive earnings. The FED flooded the market with money to save the 2008 bubble. But the government created a bigger bubble and allowed the money to be concentrated to the top 0.1% of the population. Just when the FED is trying to rein in the inflation, here comes the new government promising a rosier stock market. Is there an inflation? Just look at the Big Mac index, Japan is about 35% cheaper, and Hong Kong 50% cheaper than the good old USA.

Perceive yourself selling conservative stocks at 25% loss in capital. Can you take it?

In our view, it is definitely not the time to buy.

When the youngsters in their twenties said “I invest in the stock market and I have succeeded in the short term” it’s a dangerous sign. We heard the same thing 2015 in Beijing, 2007 in the US on housing and stocks.

“Why Republicans’ support for Donald Trump is sky-high”

http://www.bbc.com/news/world-us-canada-39083799

You can hold utility stocks but should follow channel trading principles to take profit and to clean position when the time comes.

  • Take profits: when the price surges and reaches the channel break-up-line in a long-term steady up-channel, or a flat-channel. If not for the market excitement, utility stocks often form a wide flat-channel in their price movement.
  • Take more profits: when the price comes back to the channel-sell-line.
  • Clean: when the price falls below channel break-down-line.
  • Stay away, until a new channel is formed.
  • Rebuild a long position to hold for the dividend, when a new flat channel or slightly up channel is formed.

If you are not familiar with channel trading please refer to

The Basics of Channel Trading

 

Let’s consider the “10 Best Electric Utility Stocks for 2016 – Top Stocks – TheStreet Ratings”

https://www.thestreet.com/topic/21541/top-rated-equity-electric-utility.html

 

First, look at their monthly charts. Not surprisingly, all of them formed pretty good looking long-term up-channels. We showed four of them as examples. You can download Earning Channel and see them all.

 

 

If we check the gains from Jan. 2009, we can see that all but one of the top 9 Electric utility stocks have substantial gains.

Symbol Equity Jan-09 Mar-17 Gain
PCG PG&E CORP 38.49 66.59 73%
ALE ALLETE INC 32.36 67.38 108%
EIX EDISON INTERNATIONAL 32.03 79.6 149%
POR PORTLAND GENERAL ELECTRIC CO 19.57 45 130%
XEL XCEL ENERGY INC 18.59 43.85 136%
PPL PPL CORP 30.65 36.99 21%
GXP GREAT PLAINS ENERGY INC 19.38 28.9 49%
WR WESTAR ENERGY INC 20.6 54.83 166%
AEP AMERICAN ELECTRIC POWER CO 33.49 66.47 98%

Let’s look closer, if the P/E returns to the long-term norm of 15, some of the stocks will depreciate more than 30%, one even down 72%. We believe by then, many of the conservatives will be very painful, and may sell at the bottom.

Symbol Mar-17 P/E EPSttm price P/E=15 Price drop $ Price drop %
PCG 66.59 24.21 2.75 41.25 -25.34 -38%
ALE 67.38 21.52 3.13 46.95 -20.43 -30%
EIX 79.6 19.8 4.02 60.3 -19.3 -24%
POR 45 20.73 2.17 32.55 -12.45 -28%
XEL 43.85 19.84 2.21 33.15 -10.7 -24%
PPL 36.99 13.21 2.8 42 5.01 14%
GXP 28.9 22.75 1.27 19.05 -9.85 -34%
WR 54.83 22.47 2.44 36.6 -18.23 -33%
AEP 66.47 53.6 1.24 18.6 -47.87 -72%

These two tables tell us clearly that it’s about time to take profits from these stocks. You should do so by following channel trading principles, and use Earning Channel as your assistant. Yes, please sell some and put money into your pockets, and not to buy more at this moment.

 

Among these stocks, WR seems to be forming a top. If you missed the profit-taking at its channel break-up point, at least take profits when the price comes back inside the long-term monthly up-channel.

 

Please refer to “Topping Patterns and Channel Trading” and “Stocks to take profit from”, for principles and techniques in handling similar situations.

Of the stocks above, only PPL has the P/E lower than 19.8. Don’t get too excited and jump in to buy PPL. Before you buy, always study the earnings carefully.

 

From the pictures above we can see that PPL paid very stable dividends.

Take (0.38*4)/36.99 = 4%. Not so high, but very agreeable comparing to putting money in the bank.

 

However, the revenues and EPS of the last 8 quarters seemed fluctuated. So, it is not quite certain whether PPL has room to grow. It is suggested that you visit the company website, sift through Google, Finance! Yahoo, Seeking Alpha, etc. Double check and see if the fundamentals sustain.

 

Now, let’s look at the price movement.

The monthly chart showed a steady growth, although the capital gain is modest. However, notice that the volume decreased in the last few months. It is alarming. Please double check the fundamentals.

The monthly chart tells us that the price is reaching the upper wall.

We should wait for it to come down, and to take some profits at the channel-sell-point.

 

The daily and weekly channels also tell us that the price is reaching their upper walls.

So, if we want to buy, we should wait for the price to come back to the lower wall, and bounces back to the channel-buy-line, that is the channel-buy-point.

 

Using Earning Channel, we can use the action plan to automate the alerts. We can use the monthly, weekly, or daily chart to set the action.

 

In here we show the usage of the daily channel.

If you already own PPL:

  1. If you are lucky and the price surges, take profits at channel break-up, at 37.78.
  2. Take profits when the price comes back down to the channel-sell-point at 36.7.
  3. Buy back some at channel-buy-point at 35.78.
  4. Clean the position, if the price goes below 34.7, the channel break-down-line.

 

If you don’t already own, after checking the fundamentals, you can buy at the channel-buy-point at 35.78.

 

Notice that, the above timings are for reference only. All of the numbers float along the movement of the channel. Also, all of the channel trading lines, including the channel walls could be manually adjusted with your fingers. You should play with them using not only daily channels but also weekly and monthly channels.

You can apply the exercise to all of the utility stocks above, or to the stocks in your portfolio.

 

Hope this exercise is useful to you. Good luck on your investment.

The Earning Channel software, as well as the articles, tutorials and suggestions in the website and social media, are provided as tools and references to help users develop their own market analyses and make their own investment decisions. Users are ultimately responsible for the way in which they use this information to invest in the stock market. Nothing associated with the Earning Channel or the information presented in articles and tutorials should be interpreted as direct advice on buying or selling of securities.