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“Nor any Drop to Drink…”  unless you wanna pay a premium (AWR,XLU)

Posted on August 22, 2019

It may not be considered a commodity today, but there’s a good probability it will soon.

And not because there’s any more or less of it than there was a decade ago – or a century or a millennium.

Rather, the ‘progress’ of markets and science and government have all but assured us that whatever water remains out there is sure enough to be filthy, in need of state-sponsored testing and chemical treatment, and, of course, bureaucratically rationed for a price far above what it costs to ship it to you (and therefore capable of providing a robust profit to the financiers, chemical companies and utilities that spit it out your tap).

With all that, the utilities are already a highly regulated industry, so stock movements are fairly predictable.

And extraordinary moves are… well, extraordinary.

Until THIS Happened!

Consider, then, the latest pop in the stock of American States Water Company (NYSE:AWR), a firm with a $3.2 billion market cap, 1.4% yield, Price to Book of 5.68 (!) and an outsized trailing P/E in excess of 42 (with an industry average of just 17).

Whoops!

Now that doesn’t make a whole lot of sense unless you consider that a month ago, the numbers didn’t look anything like that.

But first the chart –

The bump higher in AWR shares (in red) occurred after the company secured permission from the State of California to steal more money revamp its rate card for customers.

And there’s no question that that’s worth something.  AWR was in some respects playing catch-up with the rest of the water utilities in the country.

But the move was clearly overdone, and we now expect that –

This in spite of the fact that AWR possesses the longest active streak of dividend payouts on the market today, a ledger stretching back to 1931, with increases in each of the last 65 calendar years!

Yippee – Eye – O – Eye – Ay !

There are some who may argue that with Fed rate cuts now replacing a hiking regime, utilities and other yield-bearing instruments have become all the more appetizing.  And that may be true, except that –

  1. There’s not much fundamentally on offer for AWR investors at these prices, and
  2. Bonds are also overbought and due for a correction – possibly a steep one. That will put additional pressure on utilities – particularly those that have a whiff of the overbought.

Like American States Water.

And it’s for that reason that we’re pairing AWR against the broad utility complex, as represented by the Utilities Select Sector SPDR ETF (NYSE:XLU).

A chart of the two since New Year’s looks like this –

The gap will close, and we’re going to give it some time.

A Jew and His Gold recommends you consider buying the AWR December 20th 80 PUT for $1.50 and selling the XLU October 18th 62 PUT for $1.44.  Total debit on the affair is $0.06.

Pay close attention to those expiries!

Many happy returns,

Matt McAbby

 

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