Investment Value of Electrical Utility Common Stocks

Abstract

THE DETERMINATION of reasonable investment values for common stocks assumes increasing importance as market price levels rise. If a stock is clearly and substantially undervalued, in terms of normal relationships between price and earnings, it is not particularly necessary to determine with great precision just what its value is. It is sufficient to know that this value is considerably higher than the current market price. Such price-value distortions (investment opportunities) usually occur in periods of general uncertainty, when investor confidence is at a low ebb and vision cannot pierce the clouds that darken the business horizon. At such times, the investor's most important attributes are perspective, based on a knowledge of financial history, and faith in the reasonable assurance that the swings in our economy will continue to pendulate as they always have done in the past. After a long period of rising stock prices, it becomes increasingly difficult to maintain the proper sense of skepticism that should enter into the consideration of any investment opportunity. Rising prices themselves breed optimism, which is apt to turn into confidence that the upward trend will continue. However, the margin of safety that inheres when prices are low narrows and, if prices continue to rise, sooner or later disappears. It is at this point that the investor must make sure that he is not paying too high a price for the future return, measured in both income and expectable capital appreciation, that can be anticipated with reasonable confidence. This is a matter, moreover, that transcends in importance any possible impact on the investor as an individual. Unjustifiably high market prices engender their own correction, and many are financially injured in the subsequent decline in paper values. When this happens to the common stocks of our regulated utilities, there are bound to be repercussions that are unfortunate and unfavorable to continued private enterprise in this field. For this reason, if for no other, the relationship between the market price level and the sound investment value of their company's common stock should be a matter of continuing interest to utility corporate management.