Down 63% in 4 Days: Should You Buy Hawaiian Electric Industries?

Merlin Rothfeld - Barchart - Fri Aug 18, 2023

As the tragic events from the Maui fires continue to unfold, the finger of blame has pointed squarely on Hawaiian Electric Industries (HE). The newly filed class action lawsuit alleges that Hawaiian Electric “chose not to deenergize their power lines during the High Wind Watch and Red Flag Warning conditions for Maui before the Lahaina Fire started”. This, coupled with several other lawsuits has pushed the share price of HE stock down over 63% in the last 4 trading sessions, its lowest price in 38 years.

Several viewers on my show have asked me if now is the time to buy shares given the huge discount and juicy dividend. To answer that question, it would be prudent to look for similar cases which have happened in the past. Having grown up in Northern California, the Tubbs Fire of 2017 comes to mind and is eerily similar. The Tubbs fire burned over 36,000 acres of land, destroying over 5,643 structures, and killing 22 people. Many pointed the finger at the Pacific Gas and Electric Company (PCG), accusing downed power lines of having started the fire. From early October of 2017 to February of 2018, PCG fell from $68 to $37. I’m sure many felt at that time that PCG was a great value buy. However, PCG filed Chapter 11 bankruptcy, often called a reorganization bankruptcy. This allowed them to restructure their business affairs, debts and assets, while still remaining in business.

It’s important to note that PCG was also hit by the Camp Fire in 2018, which was much bigger than the Tubbs fire.

As you can see, the initial fall did present an investment opportunity in PCG, as it rallied from $37 to $49 over the next year. However, there was still a lot more downside to go. PCG ultimately bottomed out at $3.55 in October of 2019. Surprisingly, when they emerged from bankruptcy in 2020, shareholders still held their shares. Usually, shareholders are left with nothing.

The current situation with Hawaiian Electric looks pretty bleak. As of Thursday night, Hawaiian Electric is down 71 % for the year, and down 69% in the last 16 trading sessions.

This will obviously pique the interest of many value investors. Interestingly, price also fell into a demand zone at $10 on Thursday, a price that Hawaiian Electric has not seen for decades! As a supply & demand trader, I would normally look at this as a great buying opportunity. However, I’m not sure the pain is over for the stock. From the video footage I’ve seen, it’s clear that mistakes were made by Hawaiian Electric as the winds were throwing around powerlines like tassels on a belly dancer.

Looking at the current situation, I see 3 possible outcomes:

Outcome #1 – All the blame is put on Hawaiian Electric. If this happens, bankruptcy will be a certainty, with the most likely outcome being that shares are worthless. Aggressive investors must weigh the possibility of their shares going to zero. Is that a risk you’re willing to take? There is a slight chance that you would still retain shares like the earlier PG&E example, but that’s a longshot. News emerged yesterday that they were already looking for Chapter 11 council. Not good news. If bankruptcy does happen, you can kiss that attractive 6.7% dividend goodbye as well. PCH suspended its dividend payment in 2017 and has not paid one since.

Outcome #2 – The class action, and other, lawsuits drag on for years as they did in the Tubbs fire. This may suppress price for years, until there is a legal outcome or settlement. This could lock up your capital for a long time with no guarantee of a positive outcome.

Outcome #3 – It is determined that Hawaiian Electric is deemed to be not responsible for starting the fire. This would most likely put an end to the class action lawsuit as well. In that case, there would be a high probability that share price would rise significantly.

I personally feel that the most probable outcome is #1. Bankruptcy. As a long-term investor, I love finding opportunities where a company’s share price has been crushed. Some past examples were JPMorgan Chase (JPM) and Charles Schwab (SCHW). Both were in the media spotlight being dragged down with all the banking crisis doom and gloom of this past May. Investors were in panic, dumping shares. After evaluating all the risks and reward potential, I traded them both. This one is different. While I feel you can’t go wrong with utility stocks as part of a long-term portfolio, Hawaiian Electric Industries is too high risk for me. I’ll sit this one out and look for something which does not have the crushing prospects of massive litigation and bankruptcy. Caveat Emptor, buyer beware.

More Stock Market News from Barchart

On the date of publication, Merlin Rothfeld did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.