The Lessons of PG&E’s Titanic Disaster
Investors are understandably nervous over the current volatility in the stock market. Some are moving money into defensive sectors such as utilities, which typically outperform the broader market during down cycles.
This year, there have been three major downturns in the stock market. In each one, utility stocks outperformed the broader markets. In fact, in two of the three market downturns, the Dow Jones Utility Index actually rose as the broader markets fell.
But the risk of being in the wrong sector can pale in comparison to the risk of failing to diversify. This is aptly demonstrated by last week’s volatility in PG&E Corporation (NYSE: PCG).
California is currently experiencing the worst wildfires in the state’s history. As I write this, 76 people are confirmed dead, and more than 1,000 are unaccounted for. The cause of the blaze is still under investigation, but a potential culprit emerged last week.
As the fire raged on, California utility PG&E Corporation disclosed that it had submitted an “electric incident report” to the California Public Utilities Commission regarding an incident that took place just 15 minutes before the wildfire was reported. The incident was a power failure on a transmission line, and as I write this, that incident is suspected of being the cause of the fire.
Pacific Gas & Electric Co., a subsidiary of PG&E Corp. drew down $3 billion from its credit line in anticipation of a fire-related liability, but then reported that if it is found to be responsible, the liability costs would exceed its insurance coverage.
Investors fled the company in a panic. Over the course of a week, the share price fell by more than 60%, to a 15-year low.
Shares recovered some lost ground following comments from California PUC President Michael Picker that it would be contrary to the needs of California to allow the utility to go bankrupt. But that’s little consolation to investors who may have sold in a panic as shares plummeted.
Being in a defensive sector doesn’t help much if a company faces a disaster of Titanic proportions. PG&E wasn’t in good financial shape prior to the incident and it will be hard-pressed to recover. But it’s an important reminder as to why you should maintain plenty of diversity in your portfolio.
As this disaster shows, it can be far more detrimental to your portfolio to be over-allocated into the wrong company versus the wrong sector.
When it comes to finding the right companies, turn to my colleague Jim Fink, chief investment strategist of Velocity Trader. By using his breakthrough system called the Velocity Profit Multiplier, Jim is leveraging stock moves as small as 1% into triple-digit gains.
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