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Jonathan Poland
Jonathan Poland
Articles (456)  | Author's Website |

Two Legendary Investors Are Getting Crushed on This Stock

David Tepper and Seth Klarman hit with shocking crash in PG&E stock

November 15, 2018 | About:

Pacific Gas and Electric, PG&E Corp. (NYSE:PCG), disclosed this week that its equipment may be responsible for the massive "Camp Fire" wildfire that is ravaging northern California.

Guru Seth Klarman (Trades, Portfolio)'s Baupost Group recently increased its position in PG&E to 18.9 million shares at a reported price around $46.01. The stock closed yesterday down at $25.59. Baupost joined David Tepper (Trades, Portfolio)'s Appaloosa Management, which owns 3.9 million shares, but while Tepper's exposure is just 1.80% of his portfolio, Klarman has nearly 7% of his long stock portfolio in the stock. No matter how good an investor is at analyzing a stock's margin of safety, this can happen.

On PG&E's behalf, it apparently submitted an “electric incident report” to the California Public Utilities Commission days before the fire, and experienced a transmission line outage about one mile northeast of the town just 15 minutes before the Camp Fire began.

The threat is now minimal from the Camp Fire, but for PG&E the worse is yet to come. The damages are already estimated at north of $7 billion. On the balance sheet, PG&E has just $430 million in cash and an already hefty debt load of $19.35 billion. It will have to raise the necessary amount to pay for damages on top of its legal fees, which will be expensive as well. When a judgement is handed down, the chances are PG&E will be paying billions of dollars for many years going forward. Thus, even when the fire stops, do not buy this stock.

Pacific Gas and Electric serves 5.3 million electricity customers and 4.4 million gas customers across 81% of California counties. It has already gone bankrupt once, in 2004. It could happen again.

Best case, the lawsuits end with smaller settlements and the company can get California to reduce the total estimated liabilities that will fall on PG&E. In the last decade, the company has generated over $10 billion in total profit, which was mostly paid out to shareholders, another reason it has only $430 million in cash and a book value that has not grown faster than inflation.

Let's say that it can still generate that level of profitability over the next 10 years. Chances are investors will never see it. This isn't like the Deepwater Horizon event in 2010 that BP settled for $18.7 billion in 2015; it's a lot worse because BP was about 20 times larger than PG&E is currently, with far more more cash in the bank.

For what it's worth, PG&E is a public utility, so many customers have no choice but to use its services. That will help the company pay for the wrongdoing, but if it stays solvent, the long-term challenges of California's dry weather leading to wildfires will certainly have to be addressed by the company. For now, stay away from the stock.

Disclosure: I am not long or short PG&E.

Read more here: 

Seth Klarman Buys 2, Piles Further Into PG&E and Fox in 3rd Quarter

When Wildfires Spread, Pacific Gas & Electricity Stock Price Drops

First Pacific Advisors' Top Picks of 1st Quarter

About the author:

Jonathan Poland
I used to manage money. I still publish my thoughts on stocks here on GuruFocus, mainly on big cap companies. I rarely write about stocks that I own. Thank you for reading.

Visit Jonathan Poland's Website

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