Headquartered in Bilbao, Spain, Iberdrola is the biggest wind power producer and the second largest electric utility by market cap in the world. The stock is changing hands at prices in the vicinity of €14 a share in Madrid, up 430% from its 2012 bottom at €2.63. The past dozen or so years have obviously been quite generous to company shareholders.
Extrapolating the past into the future, however, is likely to be a dangerous game to play. There are two main reasons why we’re not as optimistic about Iberdrola as Mr. Market. The first one has to do with the company’s stretched valuation. At 22 times free cash flow, the stock is far from cheap, especially since a big chunk of this cash goes towards servicing Iberdrola’s €54B debt load.
The second reason for our lack of confidence revolves around the Elliott Wave chart below, which shows that the bulls are likely to run out of steam soon.
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Iberdrola’s weekly chart reveals an almost complete five-wave impulse from the bottom in 2012. We’ve labeled the pattern (1)-(2)-(3)-(4)-(5), where two lower degrees of the trend are visible within wave (3) and wave (4) is an a-b-c-d-e triangle correction. If this count is correct, wave 5 of (5) should make one last new high near €15 a share, before the corrective phase of the Elliott Wave cycle begins.
Every impulse is followed by a correction in the opposite direction, which usually erases most or all of its fifth wave. In the case of Iberdrola, this translates into a decline back to high-single digits for a 40% to 50% drawdown, which could easily take half a decade to run its course. We think that investors’ money would be better utilized elsewhere over that period.
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