Wildfire Protection Talk Lights Up Californian Utility Stocks

Shares of utility companies that serve customers in Southern California surged in Friday trade after the Golden State's Governor Gavin Newsom released a report that proposed creating a wildfire fund to spread costs from fire-related lawsuits. Newsom suggested that wildfire costs should be spread more "broadly" to include insurers and even government to help take some of the heat off utilities.

"Any real plan must allocate costs resulting from wildfires in a manner that shares the burden broadly among stakeholders, including utilities (ratepayers and investors), insurance companies, local governments and attorneys," said the report, per CNBC.

Those who want to position themselves for a follow-through move on the news should monitor these three mainstay utilities providers in the region. Let's take a closer look at each company and consider several trading possibilities.

Rosemead, California-based Edison International (EIX) distributes electricity through hydroelectric, diesel/liquid petroleum gas, natural gas, nuclear and photovoltaic sources. The company supplies power to roughly 5 million customers in a 50,000-square-mile area of Southern California. Edison's operating costs soared 55% in the fourth quarter, primarily due to wildfire-related expenses. Bank of America analyst Julien Dumoulin-Smith upgraded Edison International from "underperform" to "neutral" on March 1 and bumped its price target from $63 to $65. The company's stock has a market capitalization of $21.87 billion, offers an enticing 3.91% dividend yield and is up 19.33% year to date (YTD), outperforming the industry average by 9.24% over the same period as of April 15, 2019.

Edison shares jolted 7.24% higher Friday, April 12, on the wildfire protection news to sit just 3.62% below their 52-week high. Heavy volume accompanied the move that suggests conviction from the bulls and increases the probability of follow-through buying. Traders who open a long position at the current price should set a take-profit order near $77.50 – a crucial resistance level set in late 2017. Manage risk by placing a stop at the midpoint of Friday's trading range ($64.64) and moving it to the breakeven point if price takes out the 52-week high at $69.56. Alternatively, traders could look for an entry point on a pullback to horizontal line support at $64 with a stop positioned below the 200-day simple moving average (SMA).

With a market cap of $12.18 billion, PG&E Corporation (PCG) provides electricity and natural gas to almost 10 million customers in northern and central California through its principal subsidiary Pacific Gas and Electric. The utilities giant filed for Chapter 11 bankruptcy protection in January, citing at least $30 billion in potential liability from fires in 2017 and 2018. Ironically, PG&E has received a string of upgrades since its bankruptcy filing as analysts foresaw possible legislation passing to curb potential losses for utility companies. As of April 15, 2019, the company's stock has a YTD return of -2.82%.

Although PG&E shares are trading slightly lower YTD, they have powered up 31.21% over the past three months, with over 20% of those gains occurring in Friday's trading session despite the wildfire report criticizing the company for its role in major blazes and suggesting the state could push to break up the utility. Traders who buy here should look for an initial move to the 200-day SMA at $31.83, followed by a test of June 2018 swing low at $38.01. Consider setting a stop-loss order just beneath Friday's low at $18.83. More conservative traders may wait for a retracement to the initial breakout level at $20 before entering and use the 50-day SMA as a stop-loss point.

Headquartered in San Diego, California, Sempra Energy (SRE) operates energy infrastructure and provides electric and gas services in North America and Mexico. The company's San Diego Gas & Electric Company segment powers over 7 million customers in Southern California, while its Southern California Gas Company segment supplies natural gas to roughly 22 million customers in the region. In late March, Sempra's Energía Costa Azul LNG subsidiary received Department of Energy approval to export U.S.-produced natural gas to Mexico and re-export liquefied natural gas to countries that do not have a free-trade agreement with the United States. Trading at $129.85 with a market cap of $35.60 billion and yielding 3.04%, the stock has gained 20.91% on the year as of April 15, 2019.

The Sempra share price broke out of an eight-month trading range in late February and has continued its advance into bull market territory. The relative strength index (RSI) has remained embedded in overbought territory as the price has tracked higher, indicating strong upward momentum. Those who take the trade at this level should use the 15-day SMA as a trailing stop to let profits run as far as possible and place an initial stop-loss order under Friday’s low at $127.59. Pullback traders could enter on dips to $125, where the price encounters support from an uptrend line extending back to late December. Protect trading capital by placing a stop order slightly below the trendline.