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It’s great when a stock that you own takes off. But if it does so for the wrong reasons, it may spell trouble ahead.

The rapid rise of Southern Co. (SO-NYSE) so far this year is a case in point. Southern is a major utility based in Atlanta that serves a large segment of the southeastern United States.

The stock closed on Monday at US$53.01, for a gain of 20.7 per cent so far in 2019. That’s a big move for a utility stock in such a short time.

So why the big surge? The person to thank is not Southern’s chief executive but rather Jerome Powell, chair of the U.S. Federal Reserve, and his colleagues. Their decision to suspend rate hikes for the next several months and perhaps for all of 2019 was a gift to all interest-sensitive stocks. Southern was just one of the beneficiaries.

In the first four months of this year, the S&P 500 Utilities Index gained 10.9 per cent. Compare that with a gain of only 2 per cent for the previous six months and you can see the extent to which interest-rate policies can influence share prices.

Canadian utilities stocks have fared even better during this period. The S&P/TSX Capped Utilities Index was ahead 15.1 per cent for the first four months of the year, with companies such as Fortis Inc., Emera Inc. and Canadian Utilities Ltd. showing big gains.

In most cases, the Canadian stocks have been posting reasonable financial numbers, which helps to justify to their price rise.

But Southern Co.’s fourth-quarter and year-end financial results were disappointing, and the full-year numbers were more or less flat.

For the October-to-December period, the company reported adjusted earnings of US$256-million (25 US cents a share) compared with $509-million (51 US cents) in the fourth quarter of 2017.

For the full year, adjusted earnings were $3.13-billion (US$3.07 a share) compared with US$3-billion (US$3.02) in 2017.

First-quarter results for 2019, released on May 1, showed a similar pattern to the fourth-quarter numbers. Adjusted earnings were US$730-million (70 US cents a share) compared with US$893-million (88 US cents) a year ago. The company said that revenue and earnings were negatively affected by significantly milder than normal weather and the sale of Gulf Power Co. and other assets.

But there are other issues at work in the background that should cause investors to look carefully at this particular utility. Southern is in the process of building two new nuclear generators at its Plant Vogtle facility near Waynesboro, Ga. – the only ones currently under construction in the United States. The US$27-billion project has been plagued by cost overruns and delays and there are concerns that the problems may not be over.

According to a Reuters report from 2017, a series of costly miscalculations involving the nuclear expansion at Plant Vogtle led Westinghouse Electric Co. to file for bankruptcy. As recently as December, the Georgia Public Service Commission expressed grave concern about the project and asked for US$3.6-million to hire an independent consultant to advise them.

“We don’t want a billion-dollar surprise all of a sudden,” a staff member said in testimony before the commission. “We want to have an independent assessment that we can rely on and that we hope the commission can also rely on that either validates what the company is stating or perhaps agrees with us.”

During the earnings call to discuss the first-quarter results, CEO Thomas Fanning tried to ease investor concerns about the project, saying that the expansion is proceeding on schedule and without additional cost overruns. He assured listeners that the problems are now behind them and said he expects Unit 3 to be operational in November, 2021, with Unit 4 coming on stream a year later. When completed, the facility will be the largest generator of carbon-free electricity in the United States and, hopefully, should contribute to the company’s revenue and earnings.

However, despite Mr. Fanning’s positive comments there is still concern that the project will face more problems, including cost escalations, before it is completed.

The year-over-year decline in earnings and the lingering uncertainty over the Plant Vogtle expansion suggest investors should be leery of this stock, despite the attractive 4.5-per-cent yield.

Utility stocks normally don’t produce any dramatic surprises. But this one has the potential to do so if the Plant Vogtle expansion hits any more snags.

The shares look pricey at this point, owing mainly to the Fed’s shift on rates and its impact on the entire utilities sector.

Sometimes stocks are oversold on bad news. This looks like a case of a stock being overbought.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.

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