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American Electric Power Isn't Pricing In Risks


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One interesting development of the significant turmoil that COVID-19 caused in the financial markets back in March is that companies with seemingly little or no correlation to economic growth saw their stocks pummeled. One such example is American Electric Power (NASDAQ:AEP), one of the largest regulated utilities in the entire country. Shares fell from $103 to just $64 at the height of the panic, and have since rebounded back to $86.

AEP was very expensive, in my view, before the crash, and while the valuation has improved, it appears to me the risks to AEP’s revenue and earnings are meaningful enough that a reset is needed. As such, while AEP is a very attractive business to own long term, I think it needs a pullback.

The stock rebounded hard into the upper-$80s off of the crash low, only to oscillate since then, trying and failing in right about the same area we’re in today. With the stock at $86 as of this writing, and right at the same spot where resistance has proven too much to overcome a few times since the crash low, I think we’ll get the chance in the coming weeks to buy AEP lower.

Earnings show potential risks

AEP has an attractive mix of business, as we can see below. The company is huge in the utility world, a sector dominated by a few large players, with myriad smaller, regional players. AEP is firmly in the former group, with its $43 billion market capitalization. This is one of the reasons why the company is attractive; it has scale in an arena where scale is difficult to achieve.

Source: Investor presentation

The mix of business is interesting as half of AEP’s total revenue comes from residential customers, while the other half is mostly from commercial and

This article was written by

Josh Arnold profile picture

Josh Arnold has been covering financial markets for a decade, utilizing a combination of technical and fundamental analysis to identify potential winners early on in their growth cycles. Josh's focus is mainly on growth stocks. His goal is efficient and profitable use of capital, which overly rigid buy-and-hold strategies do not allow.

Josh is the leader of the investing group Timely Trader where he focuses on limiting risk and maximizing potential reward. Features of Timely Trader include: real-time alerts, a model portfolio, technical charts, sentiment indicators, and sector analysis to find the best trading opportunities. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (1)

Another who missed it, HD was $142
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