ENB – Enbridge and the Perfect Sell Signal!


“Macquarie Starts Enbridge at Outperform” – June 6, 2013

“Canaccord Genuity Upgrades Enbridge to Buy” – June 3, 2013

Really?

Who do you believe in the equity markets?  Do equity analysts’ ratings hold any sway with you?  I often wonder if anybody really cares about these ranking changes.  Better still who is Macquarie talking to with their Outperform ranking?  Are they communicating to the retail investor, the institutional client or Enbridge, the company, and its executives?  Is Macquarie after investment banking business and want to show case the company in the best possible light?

Better still why do websites and the business press trumpet such upgrades?  Are these announcements a public service?  Is it newsworthy?

I have long given up on these ratings.  Are they meaningless?  Probably.  So where do you get the truth?  Would an analyst ever tell you to sell an investment?  Model Price math tells you to sell!  Let me give you an example.

Enbridge

First let’s start with our short-term model price chart (weekly price bars)

Enbridge Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Enbridge Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of ENB subsequent to this post will be maintained on Facebook, here.

As you can see you have two negative transits (see up arrows).  The first occurred in the first week of April.  With very strong stocks, with multi-years of gains, the first negative transit is usually a warning sign of a possible negative transit sometime in the future.  This makes sense because buyers take the opportunity of initial price weakness to pickup, in their view, a cheap price on a good investment.  As you can see ENB rallied back over EBV+5 and made new highs.  This is classic!  The momentum crowd gets all excited when this happens.  Then the last week in May, the second negative transit occurs, with a big down price bar.  This obviously is the second negative transit and confirming the initial negative transit back in the first week of April – this is the perfect sell signal in my view.

Why?

In my view the stock tried to stay above EBV+5 in terms of valuation.  As a matter of fact Enbridge has tried on two separate occasions to trade above EBV+5 and has failed on both occasions.  So the market is saying, no matter how much we love the stock and the company, “we” the collective market, cannot give Enbridge a valuation in excess of EBV+5.  So this means the zone of EBV+4 and EBV+5 is where Enbridge belongs.  EBV+4 becomes support and EBV+5 becomes resistance.  In other words Enbridge has limited upside and a big downside of 23 to 25% – this is to EBV+4, EBV+3 is a further 20%!

For some perspective let’s have a look at a very long-term model price chart on Enbridge going back to 1995 from our database.

Enbridge Inc. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Enbridge Inc. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

There are a number of observations you can make from this above long-term Model Price chart.

1.  Enbridge has never traded at EBV+5 going back some 18 years, the length of our chart.  (Actually we have data going back to 1980 – 33 years – and ENB has never traded at EBV+5!).

2.  Enbridge traded on its model price calculation up until 2005.  Starting in 2005 the differential between ENB’s stock price and our model price calculation started to widen.

3.  For the most part Enbridge was comfortable trading around EBV+3, certainly in a higher interest environment than we have today.

4.  Enbridge has been a multi-decade winner in terms of stock market or rate-of-return performance.

5.  I believe this chart perfectly illustrates valuation.  With Enbridge being a utility its basic business hasn’t changed all the much over the period covered by our model price chart.  As you can see Enbridge has traded at a valuation low of EBV+2 during the “Internet Bubble” of 2000 to its current valuation high of today.

Conclusion

So within a blink of an eye our model price charts can give you not only a definitive sell decision but also multi-years of investment analysis that is incalculable not to mention a time saver!

I have no idea what “Outperform”, “Buy”, “Sector Perform” and of course my favorite “Conviction Buy” analyst ratings mean or if anybody uses them but you be the judge on who to believe, investment firm analysts or Model Price Theory [MPT].

Of course and as always we’ll see what happens and who is right!

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