Stocks of large, dividend-paying companies have been a popular investment at a time when bond yields are at record lows large part because they offer a solid, yield-based defensive strategy while also promising at least the possibility of price appreciation. Here is one example of a solid growing defensive stock. I am wondering how long this "high-yield defensive stock" can continue to grow like it has been.
Wisconsin Energy Corp (WEC) is the largest electric and natural gas utility in Wisconsin and the 7th largest in the country. WEC serves 1,132,500 electric customers and 1,049,500 natural gas customers in the Great Lakes region (Michigan and Wisconsin).
Analysts downgrade WEC
- · Analysts at UBS downgraded Wisconsin Energy Corp from "buy" to "neutral." This is not the only analysts downgrading the utility stock.
- · Goldman Sachs downgraded shares of Wisconsin Energy from a neutral rating to a sell rating. They noted that the move was a valuation call.
A valuation call-for what reason? Take a look at the following chart below:
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After looking at the chart, I ask myself-- why would they do this? I believe there comes a point when the run could be at jeopardy in the minds of analysts. Think about it-- how long can an investor live in this near perfect investing dream world? This is a world where high yielding defensive stocks (usually less prone to market swings) also continue to grow while the market proper struggle greatly. There comes an end point-- when is that?
Wisconsin Energy is showing us signs that its most recent bullish trend may be coming to an end. Look at the following chart we see a steady decline in the (% since) starting back from a year ago. Not only do we see this decline, but revenue was down by 4.8% last quarter. Let's do the math. If EPS is up 24.4% form last quarter and revenue is down, where is the money coming from to sustain this type of earnings growth? I believe this is contributing to fears that the value of the stock is dropping.
(click to enlarge)
Wisconsin Energy last announced its earnings results on Tuesday, May 1st. The company reported $0.74 EPS for the quarter, meeting the Thomson Reuters consensus estimate of $0.74. The company's quarterly revenue was down 10.3% on a year-over-year basis.
Not only has it continued to push into the over bought zone since it started its run, but we can also observe a well defined negative divergence taking place in the MACD. A negative divergence takes place when the MACD MA's converge with the MACD Histogram, this is a sign of a probable slowdown. If we look at the chart we can also observe the recent lows continuing to dip lower.
I cannot predict that the stock is going to slow down and make a bearish turn, but this is a sign we should not ignore. Not only do the visual charts show us of an impending slow down, but the stock is also falling from grace with analysts also who believe the company cannot continue to raise earnings while revenue decreases. At one point the earnings will have to balance out and when that happens, the value of the stock will adjust accordingly.
I do not see this stock rising much further.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
