The Prudent Investor


Removing American States Water Company From Consideration
February 13, 2007, 9:47 am
Filed under: Water Utilities

It is not possible for me to emphasize how important it is to understand what is going on in a company. A case in point is Enron. We all know what befell Enron, but let me take you back to a time when it actually was an excellent company.

I made my first purchase of Enron in 1997 when I was looking to purchase a utility company. I looked at their annual report and understood how they made their money, and quickly understood why they had become the largest supplier of natural gas in North America. I did have some concerns, however, and wrote Investor Relations. I received a prompt answer from them. They addressed those thoughts and I opened a Dividend Reinvestment Plan.We all know what happened later. It became much more difficult to understand where their money was coming from (or at least where their reported money was coming from), as the information they offered in their quarterly and annual reports were broken apart to the extent where it was no longer understandable. I again contacted Investor Relations and the information I received did not give me comfort. If I had been a little more experienced, I would have sold at that point. However, I waited until the price dropped and resulted in a small loss for me (fortunately, I did not wait until it plummeted towards its bottom).

So what had actually been an excellent company turned into the disaster we know Enron today. As an investor, the difference in my feelings about the company came when I began to lose confidence due to legitimate concerns I had identified, and had I acted on those concerns then I would not have seen a gain turn into a loss.

This is why knowledge and comfort are essential to me in the selection of a non-speculative stock. My concern with American States Water Company has to do with the numerous Form 4 filings indicating officers selling their shares, and the numerous Form 4-A filings, which are adjustments to previous Form 4 filings.

An officer selling shares of their company does not necessarily constitute a negative event. An example can be seen with the many Form 4 sellings of SJW Corp., which are probably due to the incredible increase in stock price it has seen over the past year – I would also be taking profits. Also, Form 4-A corrections are not necessarily a negative thing – mistakes can be made, and corrections are necessary.

However, never receiving an answer from the company’s Investor Relations department is a real concern. Were they to give me an explanation as to what is happening then it would not be difficult to give me comfort. However, without this information, I can only envision a disaster befalling the company, and wishing that I had had knowledge of the reason at a time when I could have had this knowledge.

The thing that forced me into the decision to remove it from the list came from a re-reading of the 10-Q, where they state that their future expenditures will exceed their cash. They will cover this through the accumulation of more debt and the issuance of more stock, thus diluting the currently outstanding shares.

So these concerns force me to remove American States Water Company from my list of considerations.

On Thursday I am going to remove one more company.

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1 Comment so far
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Thank-you enjoy your commentary and insight

Comment by scott




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