Shocking Returns in PG&E

From May 2022 to November 2023, PG&E (NYSE: PCG) returned over 40% compared to 12% for the S&P 500 and a loss of 12% for the XLU Utilities ETF. This post will detail our 2022 investment case for PCG and how the process sharpened our value-investing research. Compelling opportunities like PCG exist today. Understanding the dynamics from this case will help investors find these opportunities in the future.

You Want to Buy What?

PG&E filed for Chapter 11 Bankruptcy protection in January 2019 after being convicted of 84 felony counts of involuntary manslaughter. Company negligence had caused several deadly wildfires in California. The stock was delisted from the New York Stock exchange, and equity holders were wiped out. At the time, this was the largest utility bankruptcy in US history. Upon reemerging from bankruptcy protection, wildfire victims owned 22% of the newly issued shares. Notably, passive investing firms owned roughly 20% of every other public utility, but they owned 0% of “new” PCG. Both legacy and social media regularly lambasted the company for its prior sins. The sentiment was overwhelmingly negative and our research required a contrarian mindset.

The Hope of Patti Poppe

Appropriately, PCG purged top-level management during the bankruptcy process. New CEO Patti Poppe had the seemingly impossible task of appeasing numerous opposing interests united in their anger towards PG&E. As the first female CEO of two different Fortune 500 companies, Poppe is built different. She had a clear plan for wildfire risk reduction that calmed customers, her background as an industrial engineer earned the respect of PG&E workers, and her genuine demeanor helped sell initiatives like “lead with love” to California regulators. Poppe is responsible for an increase in business quality that made PCG investable. What about the rest of the case?

Valuation and Catalyst

At our buy price of $11 per share, PCG was trading around 10x earnings compared to 20x for utilities in the XLU ETF. The company emerged with a burdensome amount of debt, but management guided debt paydown and an interest coverage ratio similar to the group. How, though, will the valuation gap close? In this modern market dominated by passive investing strategies, we believe value-investing is improved if there is a catalyst to release the value.

In the case of PCG, management had clear plans to make the stock eligible for the S&P 500. Because PG&E was still one of the largest electric utilities in the country and had posted four quarters in a row of profitability, S&P added PCG to the index in November 2022. Most companies getting added to indices are already in another index and addition to a different index has little effect. However, since PCG was a newly emerged company, indexers had zero ownership! Upon S&P 500 addition, large asset managers needed purchase 20% of PCG shares seemingly overnight. Index addition was a major catalyst for PCG. This jolted the valuation higher and drove outperformance for many months as you can see in this chart.


As active managers, adaptation is far preferable to death. The usual value metrics are insufficient to generate consistent outsized gains in today’s market. In addition to the fundamentals, we must add the toolkit of knowing and exploiting the large passive players that dominate market flows. PG&E is an example of a catalyst-driven value idea that worked. We have leaned into these ideas since then with additional success. Thanks for reading!

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