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APA Group (APA) $10.05

APA is classic defensive stock with regulated earnings linked to critical energy infrastructure. A lot of talk in the market has been around the high valuations being ascribed to these sorts of stocks as investors look to ‘hide’ in lower-risk equities, however, APA is trading  ~25% below its 12-month high with weak momentum. We suspect the current lack of interest is for a few reasons.

  • When interest rates (and bond yields) were at rock bottom, fixed income was very unattractive and that led to the term being coined, There Is No Alternative (TINA), meaning that investors were forced into equities.
  • ‘Bond-like’ equities such as APA benefitted the most and their share prices rallied strongly. We’re now in a more ‘balanced’ environment, where traditional fixed income is back to being a real alternative. This reduces the appeal of stocks like APA, which should theoretically trade back to more normal pricing metrics.

As we’ve written in the past, we value APA fairly simplistically based on its yield above 10-year bonds, with recent company guidance implying a FY23 dividend totalling 55c, with market consensus at 58.5c for FY24. Using FY24 assumptions, that puts APA on a yield of 5.82% (unfranked) versus the 3.65% 10-year yield, a spread of 2.17%, which is still below its historical premium of ~2.8%, but well above the ~1% premium where it recently traded.

Last week we wrote, we intend to buy APA Group on a move below $10. The stock closed yesterday at $10.05 meaning we’re getting closer to rebuying APA Group, a stock we sold last year at higher levels.

APA
MM is looking to buy APA <$10.00
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APA Group (APA)
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