Detroit Edison stock needs to drop before it will be a good buy
May 11, 2011 9:40AM
Updated: June 17, 2011 10:18AM
De ar Mr. Berko: I’ve been thinking of buying 300 shares of Detroit Edison. But when I try to look up the stock under Morningstar or Standard & Poor’s, I can’t find it. Did they change their name like other utilities did? What is your opinion of this utility? Do you think it has good capital gain chances in the coming few years? Could it go up to the high $50s and split? My broker thinks so and wants me to buy the stock. Please advise. — W.P., Troy, Mich.
Dear W.P.: Some years back, Detroit Edison decided to present a new image to Wall Street and paid a PR firm $3.2 million to design its unique avant-garde name, DTE Energy (DTE-$51). So when you try to alphabetically find the firm in Morningstar or Standard & Poor’s research, look under the letters DTE, rather than D-e-t-r-o-i-t, as we did for the last hundred-plus years.
DTE has been selling power in Michigan for the whole of one century and parts of two others. And in each of the past dozen-plus years, its share price has ranged (excluding the bear year of 2009) an average of 30 percent between its low and high trading quotes. So, in my opinion, DTE’s current $51 market price is much too high for your entry point. In the last 12 months DTE traded as high as $51 and as low as $41. And in the past dozen years DTE’s price has exceeded its current price only once.
Most utilities have predictable trading cycles, so investors should purchase utility shares as close as possible to the bottom of a trading cycle. And in this instance, I’d place an open stop order to buy 300 DTE about 9 points lower.
I don’t care for the company, but I believe the current price is much too high and that within a year or less, you should be able to buy DTE between $38 and $41.
Berko’s Utility Rule No. 17 tells us that it’s profitable to trade utility issues by following their cyclical patterns. Many utilities have 12-month trading cycles and if purchased at the bottom of their cycles, they can be sold 12 to 14 months later close to the top of their cycle for a 20 percent to 30 percent capital gain, plus the 4 percent to 6 percent dividend. This is a very conservative way to trade the market, and if you get stuck longer than you anticipate, at least you will be holding an issue that pays a 4 percent to 6 percent dividend while waiting for a capital gain.
But DTE isn’t my cup of tea. Its dividend was stuck in a rut at $2.06 between 1993 and 2000. While it is now $2.24 and may grow to $2.50 in the next three to five years, I think this stock is a great big yawn.
DTE’s biggest problem is a city called Detroit, which has lost 26 percent of its population in the last decade. This city is a bloody mess, with an ugly crime rate, an ugly ghetto, an ugly infrastructure and an ugly future. And while earnings have increased rather nicely in the past few years, they are a result of improving net profit margins, rather than higher revenues. In fact, revenues have been flat as a pancake and earnings for 2011 may be only a tad higher than last year.
DTE is a Rust Belt utility with a Rust Belt future. Michigan’s economy is in the doldrums and continues to struggle. Unemployment is at least 11 percent with little improvement in sight. And these factors have put pressure on regulators to keep gas and electric rates low at DTE’s expense.
In fact, several requests for rate increases have been delayed, and the company has been forced to rebate the $280 million increase it levied in 2009. And while DTE’s nonregulated businesses contribute importantly to earnings, those businesses make DTE riskier than most of its competitors.
So if you must own DTE, follow my advice: Don’t hurry to own it at $51; just wait until it falls nine or so points to the bottom of its cycle, then step in and purchase your 300 shares.
Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at email@example.com.