When a Stock Falls Out of Favour

Over the past month, shares of Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN) declined in value by close to 7.5% — a very large amount for any utilities company. Although this may seem like bad news, investors should not be surprised by this price decline.

Going back to November 2016, shares traded at a low price under $11 per share and proceeded to increase to over $14 in June. Shareholders who’d bought in November have experienced price appreciation in excess of 25%.

Making things even better is the dividend yield; at a current price near $13.25 per share, the yield is approximately 4.5% for investors purchasing new shares today.

Although many investors may hesitate due to the recent pullback, it is important to realize that shares do not necessarily sell off for good reasons. For investors who’ve received a total return in excess of 25% over the past six months, shares may have been sold off for no other reason than to lock in profits. Although most investors would argue that stocks should be held for as long is needed for the companies to realize their full potential, it is sometimes difficult to continue holding a security after 80-90% of the upside is already realized. In these circumstances, it is completely understandable that investors do not want to continue holding out of fear of a pullback to previous levels.

It is important for investors to realize what opportunity this sell-off presents. After a relatively large sell-off in shares of Algonquin Power & Utilities by a number of early buyers, shares may have only temporarily pulled back before resuming a longer-term upward trend. Depending on the investment time frame of each individual investor, it is essential to consider the momentum by looking at the “recent” technical indicators. Recent is, of course, defined differently by each investor.

Looking at the 50-day and 200-day simple moving averages (SMA), shares are still very much in bullish territory as the recent pullback is still only a very small period in the bigger picture. Given the past run of the shares, the 50-day SMA is well above the 200-day SMA, signalling a continuous bullish trend. Barring another major pullback in the share price, investors will have to wait a long time before needing to worry.

Considering past trends in the share price of Algonquin Power & Utilities, the dividend yield has ranged (over the past four years) from 3.5% to 5.5%. Assuming we use the current dividend yield, which translates to roughly $0.64 per year, we can determine the low share price by using the higher yield as well as the high share price by using the lower yield.

By dividing $0.64 by both 5.5% and 3.5%, we can draw very rough lines in the sand and expect the share price to range somewhere between $11.64 and $18.28 per share for fiscal 2017. Given that the 52-week low is below $11 per share, it would seem that the bulls still have a long way to run before hitting the $18 mark.

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Fool contributor Ryan Goldsman owns shares of Algonquin Power & Utilities Corp. 

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