The Canadian stock market has produced several winners that have helped investors with a long-term investment strategy succeed. Many publicly traded companies have been good picks because their share prices do not reflect their true value. Investors who can identify such undervalued and high-quality stocks buy when prices are down and benefit from capital gains.
As of this writing, the Canadian stock market is hovering around new all-time highs. The S&P/TSX Composite Index, the market’s benchmark in Canada, is up by over 25% from its 52-week low at writing. Despite a broader uptick in the market, the TSX has several high-quality names that are lagging behind. One such name might be Algonquin Power & Utilities (TSX:AQN).
Today, we’ll take another look at the stock to help you determine whether it is a buy, sell, or hold for your self-directed investment portfolio.
Why you might want to buy the stock
Algonquin is a $6.08 billion market-cap utility stock. The company is a diversified international power generation, transmission, and distribution utility boasting over $16 billion in total assets. It provides sustainable energy and water solutions to over one million customers, primarily in the U.S. and Canada.
Utility services like water, electricity, and natural gas are essential. The sheer necessity of these services, all three of which Algonquin provides, gives the company a defensive edge over stocks from other sectors of the economy. Utility businesses also enjoy the comfort of predictable revenues due to the highly rate-regulated nature of the market.
The predictable cash flow allows Algonquin to comfortably fund its shareholder dividends. As of this writing, it trades for $7.92 per share and boasts a 4.51% dividend yield. While pressure from its debt load forced the stock to cut its dividends, it has substantial long-term growth potential.
Why investors might want to sell
Many investors might want to consider selling the stock, especially since it has posted significant gains this year. At current levels, Algonquin stock is up by 12.14% year to date. Investors who are aware of the company’s struggle with its considerable debt and high payout ratio might want to use this opportunity to get out before share prices decline.
Despite all its recent gains, Algonquin stock is volatile. There might be significant negative movements in the chart above in the coming weeks. The business is trying to turn things around, but investors who have been disappointed in the past might sell their positions in the company.
Foolish takeaway
Investors who already have positions in the stock might want to consider holding on. Yes, it is a volatile stock, and the underlying business needs considerable improvements upon what it has already achieved. The company’s decision to divest from its renewable energy business to focus on regulated utilities made a significant shift. Instead of focusing on aggressive growth, the move points toward stability as a bigger concern.
Regulated utilities generate more stable revenue that leaves room for growth while keeping dividends sustainable. While it has a long way to go to get there, the company is on the way. Its recent report showed it generated $85.4 million in net earnings, up from a loss of $56.8 million in the same quarter last year. In the end, the decision to buy, sell, or hold is something each investor must make based on their preferences. I would hold if I already had a position in the utility stock, but wait for a downturn to invest in its shares.
