Below is the annual 52-week low for Consolidated Edison (ED) from 1958 to 1968. We’ve also included the 3-month Treasury Bill as a comparison to show how utility stocks perform against the backdrop of rising interest rates.
In this example, the 3-month Treasury Bill increased from 1.77% to 4.31%. Meanwhile, Consolidated Edison (ED) had a 52-week low range from $22.00 to $30.63.
Posted in 1958-1968, Chart of the Day, Consolidated Edison, ED, interest rates
On May 18, 2018, Consolidated Edison (ED) fell to a one year low. This is a stock that we had evaluated back in September 2014, when ED was trading at $57.60. At the time, we said the following:
“Based on the Altimeter, ED is considered to be fairly valued at $54.18. This fair value is strikingly similar to the Value Line [Investment Survey] assessment. Also, according to the Altimeter, ED is considered undervalued at or below $44.00. Since 1970, there have been six instances where ED has been undervalued and went to the opposite extreme of being overvalued.
Using the above Altimeter, our observation is that Consolidated Edison has had the tendency to decline from each peak to the corresponding undervalued level without exception. Naturally, this may be the occasion when the exception occurs. Until that time comes, we’re of the view that ED will decline to the lower ascending line by mid- to late 2015. By that time, ED could be undervalued at the $50 level.”
Fast forward to the new 52-week low and we see ED trading at $73.55. This begs the most obvious question, where did we go wrong? After all, we missed out in nearly +78% of total returns in 4 years. Below are the two most glaring errors that we made with many others waiting to be revealed.
“The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great ‘earnings’ – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. ‘Mark-to-market’ then turned out to be truly ‘mark-to-myth.’”
Buffett, Warren. Berkshire Hathaway. 2002 Letter to Shareholders. February 21, 2003.
Every stock market investor should be concerned about the impact that rising interest rates might have on future investment returns. The prevailing theory is that when interest rates rise then stock prices should decline due to the impact to earnings from higher borrowing costs. Since we are at or near the lowest level in interest rates, conventional wisdom suggests that eventually interest rates will rise.
With rising interest rates, investors should expect that stock prices will decline as per share earnings are reduced. One industry that borrows heavily for going operations is the utility sector (electricity, water, gas etc.). This article will give a cursory examination of utility stocks from the beginning of a rising interest rate cycle to the peak (1939 to 1980). We will attempt to determine if the conventional thinking on rising interest rates and their impact on utility stocks is correct.
Posted in Aqua America, Consolidated Edison, ED, SO, Southern Company, WTR
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The companies that are within 10% of the low offer a great opportunity to do research and consider buying.
