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Why American Electric Power Company Inc Might Keep Pulling Back

By Brian D. Pacampara, CFA - Mar 24, 2014 at 10:40AM

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Does this analyst make a good case? Or is it just more noise from Wall Street?

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 ( AEP 0.13% ) 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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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