Allegheny Energy Inc.'s (AYE) stock has retreated about $4 in the past quarter, but investors should view the pull-back as a Buy opportunity, hence I'm reiterating my buy rating for the company, first recommended on May 25, 2009 at a price of $25.00. Here's why:
Despite the dip, electric power company Allegheny's business model remains fundamental sound, boosted by improving plant performance and effective cost controls, among other factors.
True, revenue should decline 3-4% in 2009, and that probably accounts for some of the recent selling; however, assuming a U.S. economic recovery, revenues should rebound in 2010, increasing about 5-6%. The First Call FY2009/FY2010 EPS estimates for AYE are $2.18 to $2.34.
Technically, Allegheny's stock chart has weakened: the stock has fallen below the key, 50-day moving average. Were it not for AYE's utilities sector status, the position would have been closed. But that status, combined with psychological support at $20, warrant the position's maintenance.
However, with the aforementioned technical weakness in mind, the Sell/Stop Loss has been raised to $17 from $12.
Stock Analysis: Allegheny Energy Inc. is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in AYE now; then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your AYE position before February 2010. Revised Sell/Stop Loss if you were to buy shares in this company: $17.
Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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