Why American Electric Power Company Inc Might Keep Pulling Back

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While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of American Electric Power Company Inc (NYSE: AEP  ) opened sluggishly on Monday after Jefferies downgraded the electricity utility from buy to hold.

So what: Along with the downgrade, analyst Paul Fremont lowered his price target to $50 (from $52.50), representing about 2% of upside to Friday's close. So, while momentum traders might be attracted to the stock's strength over the past six months, Fremont's call could reflect a growing sense on Wall Street that American Electric's valuation is a bit stretched at this point.

Now what: According to Jefferies, American Electric's risk/reward trade-off is pretty balanced at this point. "When we upgraded the stock back in February 2012, it was trading at an 18% discount to the group average, and since then, management has closed the gap through rate increases/cost reductions and the stock is trading at a slight discount," said Fremont. "Jefferies believes that any sale of the Genco is unlikely before 2015."

With the stock still sporting a 4%-plus dividend yield, however, that short-term uncertainty might be providing patient Fools with a solid income opportunity.

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Brian Pacampara

I take a look at big 10% moves, as well as stock-shaking analyst calls, on a daily basis for The Fool. While I don't believe in active trading, closely monitoring Mr. Market's mood swings can help identify long-term opportunities.

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Related Tickers

9/1/2015 4:04 PM
AEP $52.99 Down -1.30 -2.39%
American Electric… CAPS Rating: ****