Stated differently, as an investor, how much risk are you willing to take? Or better yet, are you aware of the amount of risk you are currently taking?
It is quite easy to get caught up, and quite hard to avoid getting caught up in a great bull market like the one we are currently in. However, it’s important to remind ourselves that: “everybody is a genius in a bull market.” In my experience, the hardest thing for investors to do is to go against the crowd. Although Warren Buffett’s advice “be greedy when others are fearful and fearful when others are greedy” is sound, it is simultaneously almost impossible for people to do. Instead of going against the grain, people tend to rationalize about how it’s different this time, and fundamentals don’t really matter.
Another insidious aspect of a great bull market is that people love a rising stock price and hate a falling one. Consequently, regardless of valuation levels, people consider a stock with a current rising stock price a good stock and a stock with a current falling price a bad stock. However, common sense would dictate that you will not find bargains investing in hot or popular stocks. Although it is often true that a stock with the rising price might generate great short-term returns, in the long run valuations inevitably and rightfully so revert to the mean.
Nevertheless, it is almost impossible to argue against a rising stock price over the short run. Investors get overconfident which leads to complacency. A great mentor of mine once asked me if I knew the definition of appreciation. As I started reciting a financial dictionary definition he immediately stopped me. Instead of the dictionary version he simply pointed out that all too often the definition of appreciation is when others appreciate what you own more than you do. Unfortunately, investors should beware that short-term gain often leads to long-term pain. This is especially true when valuations are above what fundamentals would rationally suggest and/or support.
Importantly, nothing that has been said thus far would suggest that stock prices cannot remain excessively valued for relatively long periods of time. In truth, this happens quite often. Therefore, I am not trying to suggest that you cannot make money by investing in an overvalued stock. In truth and fact, a stock with good momentum can be an excellent investment over several months or even years – especially in a long-running bull market like we have today. However, investors should be fully aware of the amount of risk they are assuming by investing in excessively valued stocks. Therefore, I suggest that recognizing excessive valuation is more about risk assessment than it is about possibly losing money – at least over the short run. Stated differently, as an investor, how much risk are you willing to take? Or better yet, are you aware of the amount of risk you are currently taking?
NextEra Energy Inc. (NEE) and WEC Energy Group Inc. (WEC): Great Utilities Risky Stock Values
From my personal perspective, the two best utilities(NYSEARCA:XLU) in America are NextEra Energy Inc. and WEC Energy Group Inc. There are numerous reasons why I feel this way. One of them is simply personal bias. I reside in Florida and my wife and girl of my dreams hails from Wisconsin. However, personal bias aside, these are two of the most consistent and fastest growing utilities in the country. Both utilities have grown earnings at approximately twice the rate of the average utility company. As a result, both utilities have produced significantly more dividend income than the average company (S&P 500(NYSEARCA:SPY)), and both utilities have consistently increased their dividend more than the average company. Additionally, both companies are A- rated and both have solid balance sheets and reasonable debt levels. To summarize, as utility stocks go, there’s a lot to like about these two.
Consequently, if you currently conduct research on either of these utilities you are likely to find very positive write-ups and recommendations. Within these write-ups you will find many factual and positive pieces of information about how great these two businesses are. Moreover, most everything that you read will be truthful and correct. As the title of this article states, these are my two favorite utilities. However, my title also suggests that I hate the stocks. Although this is true, it is only because I consider both excessively overvalued relative to their great fundamentals. Therefore, if I were to find them attractively valued again in the future, as I am basically certain I will, I will be a ready and willing buyer of either or both.
FAST Graphs Analyze Out Loud Video: NextEra Energy Inc. and WEC Energy Group Inc.
In the following analyze out loud video I will clearly illustrate why I believe that both utilities are significantly overvalued. Conversely, I will clearly also illustrate what great businesses both are, and how well they have both historically been run. Therefore, and the most important objective of this article, is to simply provide the reader the awareness of the risk associated with investing in either of them today.
Summary and Conclusions
NextEra Energy Inc. and WEC Energy Group Inc. are both great utilities and both have excellent prospects for future operating performance. However, thanks to the current bull market and very positive investor sentiment, I consider both significantly overvalued. Most importantly, I am suggesting that neither represents a good candidate for fresh money at their current levels. On the other hand, if you have been a long-term holder of either, I am not necessarily suggesting that they be immediately sold. Nevertheless, I am suggesting that you be aware of their current high valuations and pay close attention to what might be occurring in the future.
Disclosure: Long NEE at the time of writing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.