Are merchant power assets overpriced?
Michael Wyman is an analyst with a major U.S. energy company. He formerly worked in the Ministry of Energy in the Government of Ontario and published a study on the Ontario electricity market for the C.D. Howe Institute, Canada’s leading economic think. This article represents solely the author’s personal views and not those of his employer.
The concept of the value trap is an old one. Warning against buying assets simply because they have declined steeply in value, Richard Wyckoff, a stock market authority of his day, warned in 1924 that “there are a great many times when a security will decline in market price while its intrinsic value and earnings power are shrinking even more swiftly.” The question arises: have assets declined in price because investors over-reacted and shied away from risk unduly, or because the underlying discounted value of future cash flows has decreased markedly?