California Water Services Group (CWT) has finally arrived at the point that we’ve anticipated for the last 2 years. On January 3, 2010, we submitted an investment observation that CWT would continue to trade in an established 6-year range that had been identified for at least 4 other periods. Just as a debrief, in the 2010 piece (found here), we said the following periods traded in 6-year ranges after breaking out of the previous range:
- 1976 to 1982
- 1985 to 1993
- 1993 to 1997
- 1997 to 2004
- 2005 to 2011
In a January 3, 2011 piece (found here), we reiterated our view on CWT by saying the following:
“…based on cycle analysis, the prospects of CWT making a substantial move above the prior high would be between 2011 and 2012.”
As we enter 2012, we’re of the view that this is the year that California Water Services Group will break above the 2006 and 2009 highs of $23. Those interested in buying this stock should acquire large quantities and be prepared for the downside risk. We are reiterating our downside targets at:
Additionally, CWT should be considered a relatively risky stock because of its low daily trading volume. With a 3-month average volume of 220,000 shares, this stock may not be suitable for investors who are concerned about getting the "best" price. However, collecting the current dividend yield of 3.40% should provide some consolation for the wait to rise above $23 in 2012.
Finally, a boilerplate disclaimer that should be considered for any water utility stock. Although water is critical to life, stock investors need to understand that companies in the water industry aren't a "sure thing." The biggest reason for this is that when and if water becomes “scarce,”government regulators will step in to take over (nationalize) what should otherwise be sold at the most profitable price (thereby curbing wasteful consumption.) There is literally an upside cap on profitability to a company like this due to the critical importance of the resource being sold.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CWT over the next 72 hours.