Housing Headwinds for FPL?

11/10/2008 11:00 am EST

Focus: STOCKS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer's Investment Research thinks a popular defensive stock may face more selling pressure if housing worsens in Florida.

A recent BusinessWeek article ("FPL Group, an Attractive Power Play," October 29th) focused on FPL Group (NYSE: FPL), a Florida-based utilities company. "It is the best and safest bet in these times of economic dislocation and financial stress," says Carl Birkelbach of Birkelbach Investment Securities'. Specifically, he likes the 4% dividend, [which he calls] "...a comforting payout to shareholders" amid the current turmoil. As such, he believes that "the stock deserves to be a core holding in every portfolio," according to BusinessWeek.

But Birkelbach isn't the only analyst playing up the shares' potential. Justin McCann, an analyst at Standard & Poor's Equity Research, recently upgraded FPL to Buy from Hold, noting that "the stock is attractive for total return."

Meanwhile, Timothy Winter, senior analyst at investment firm Jessup & Lamont, says that "at the current share price, we consider FPL to be an attractive buying opportunity for investors with a 12- to 18-month time horizon." Along these lines, Winter goes on to note that because of the economic and housing problems in Florida, investors should "look beyond the valley of the next 12 months."

Clearly, the analysts in this BusinessWeek article are looking at FPL from a long-term perspective, with targets out 12 to 18 months. However, it was Winter's comment about the "valley of the next 12 months" that caught me off guard. This seems to imply that FPL has more selling pressure to face in this economic environment, and, looking at the stock's technical backdrop, I would agree with this assessment.

Specifically, the shares are facing short-term overhead resistance in the $46-$47 region-an area that has held FPL in check since early October. Furthermore, long-term resistance resides at the $50 level, along with the stock's declining ten-week moving average. (It closed just below $47 Friday-Editor.)

On the sentiment front, it would seem that complacency rules the roost. On the options front, FPL's Schaeffer's put/call open interest ratio (SOIR) of 0.70 ranks in the 54th percentile of its annual range. Meanwhile, Zacks.com reports that the shares have garnered eight Buys, six Holds, and one Sell rating. There is potential here for upgrades or unwinding pessimism from the options crowd, but, given the technical hurdles FPL must face during the next several weeks, this sentiment outlook could just as easily take a turn for the worse.

If we see more bullish FPL features like this BusinessWeek article, my concern would be that sentiment is shifting toward the bullish end of the spectrum. Should such a shift occur without a corresponding rally in the shares, I fear FPL shares could be in for another pullback before things get better.

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