Since early October, Pacific Gas & Electric stock has lost more than 85% of its value. And now, it has filed for bankruptcy. Following PG&E bankruptcy filing, S&P Global Ratings slashed credit grades almost to junk status for California’s two other big electric utilities, owned by Sempra Energy and Edison International. But the problems stem from regulations as much as mismanagement by PG&E and other utilities.
California is one of the only states in the country in which courts have applied what is known as inverse condemnation to events caused by utility equipment. This means that if a utility’s equipment is found to have been a substantial cause of the damage in an event such as a wildfire, even if the utility has followed established inspection and safety rules, the utility might still be liable for property damages and attorneys’ fees associated with that event.
And so, we have a situation where Utilities – one of the safest, most defensive industries to take shelter in down markets, now has volatility matching the aggressive growth names in Technology. As an investor, is time to listen to Warren Buffett who famously said “Buy when there’s blood in the streets” (or fire, in this case) or stay away?
Future Wealth’s View
Pacific Gas and Electric’s bankruptcy has exhibited the one trait that one never wants to see in a utility stock — instability. Investors buy a utility stock to benefit from a stable, slow growth equity that yields dividend income. All the major utility ETFs and funds promise one thing – safety in choppy markets. Not anymore. As much as there are fundamental problems at PG&E, forcing the company into bankruptcy is not good for investors and consumers alike. Few expected widespread negligence to take a utility company down. However, PG&E has become the exception.
As much as we, at Future Wealth, ascribe to Warren Buffett’s philosophy – in this case, we would take exception this time. While the PG&E bankruptcy has us rethink the sector as haven for safety, throwing new money with expectation that somehow the stock is going to bounce back from current levels to its previous levels is just a pipe dream. Just ask Sears investors who bought the stock at $3.00 last year just before it plunged into bankruptcy, hoping its stores would be bought by Amazon. Sears stock is now at $0.92.
As the saying goes in the Wall Street – “Just when you think the stock cannot go any lower, it will and it does. The floor is $0.00”.