The nets like Duke Power at the margin, but do you buy it for the yield, the swing play, or what?
Dec 01, 2008

Note: I'm still not up to speed on graphics capabilities of Movable Type. No charts will be provided this time, but there will be charts and video coming soon.

I remember 1974 vividly. Nixon resigned. The U.S. was in a recession, and I was an intern at DUK power before I was approved to be a R&D coop student at a local chemical manufacturing facility. I remember everyone worried that DUK was going to take a beating over the next three to four years as oil and natural gas prices were starting to spike. I think the dividend yield on Duke Power) was right around 5% at the time.

Does that sound familiar? Well, not exactly. Nixon's dead. I quit installing dead end shoes on power cables (and began trading stocks) almost 35 years ago. But there is a similar analogy I think.

In the summer and fall of 1974, U.S. equity markets cratered. The last of the nifty fify stocks that soared in the 1960s were as dead as George Blanda looked when he played his last or next to last year for the Oakland Raiders.

And that is kind of where we are today. DUK's dividend yield is right at 5.91% (as of Friday, November 27, 2008). The U.S. equity markets are on their backs with referreeing pundits are counting nine of a ten-count and calling our markets dead. 1974 was, in retrospect, one hell of a good time to buy DUK. Is this time another good time? It depends.

 As a swing trade:

 Well, the fact that DUK missed its earnings estimates on November 6 apparently some effect on the stock price, but earnings were down because of LOWER customer power usage and not so much energy costs.It is highly unlikely that any major energy legislation is going to impact DUK for the remainder of the year, so as a short-term swing trade it has potential.

 This pattern is essentially on a daily chart a Gartley C buy point (I will explain that in future episodes), but the win percentage of this model is slightly better than breakeven (54%) and the dollars won/dollars lost ratio is about 1.26/1. The first target of this swing would be 17.20 and the outside target would be 18.20. The entire span of these targets is likely to be 4 to 6 weeks total, but it could take longer depending on events (it is somewhat difficult to pin a timeframe on this as volatility has been quite high in recent weeks).

As a position trade:

It is difficult to know with certainty whether DUK's dividend is safe, but it has a couple of decent reasons to remain uncut. One of the reasons is the strong economy of the Upstate of South Carolina and the Charlotte region of NC. Their other service regions (OH, KY, and international) are not in bad shape.

What is in bad shape? Their dependence upon coal as the primary source of fuel (virtaully 50% of all the power DUK generates). Should the new Obama administration make good on its threat of bankrupting the coal industry, then that could be a big problem. If not, then all might still work out. The dependence on coal could be a large negative.

If one could assume that near free cash flow value for DUK was somewhere around $18, then getting paid that 5.91% yield would not be so bad as long as the company hits its earnings targets. Yet it is really hard to know what may happen, given the shakiness of our current credit markets.

Conclusion:

If one were going to make a long bet on DUK, one might be smart to make it a very small one, even on a swing trade basis. There is certainly decent technical reasons to believe the shorter-term and longer-term swing targets could be hit. As we move into next year, however, the picture probably gets cloudier. Any long position could be negatively affected by economic downturn or U.S. energy policy.

It sounds like I just made a weak case for owning DUK. Weak it is, but in many respects, that is about as strong a case as anyone can make for any stock in any sector given the precariousness of the U.S. economy.

But would you have bet that in 1974 that both "Bum" Phillips and George Blanda would still be alive today? I woundn't have.

That's why markets exist. One just needs to trim one's bets to keep from being 100% wrong.

That's it for now. Only time will tell for DUK.