Reasonably Thinking

 I initiated a new long position today: 30 shares of Exelon Corporation (EXC) at $46.14.  Exelon is (I believe) America’s largest utility company; it’s primary markets are Chicago (ComEd) and Philadelphia (PECO).  Being a utility company, some of you may view this as a rather bland play, and to some degree, it is.  However I see this as an appropriate tactical maneuver in a strategy that allows for an open minded approach to investment success.

This story begins late last year.  In December, Bill Gross (of PIMCO) opined in favor of purchasing utility stocks.  His argument is that over the next several years, “Diminished growth, deleveraging, and increased government involvement will temper profits and their eventual distribution to investors.”  In such an environment, utility stocks will adequately perform.  I agree.

In last week’s issue of Forbes, Exelon was named one of America’s Best Companies (only three were highlighted).  The article mentioned that Exelon runs 17 nuclear reactors, “by far the largest nuclear fleet in the nation and the third biggest in the world.”  With its nuclear advantage, Exelon can produce low cost, carbon free energy, something that other utilities cannot do.  “Exelon’s nukes turn out 130 billion kilowatt-hours of electricity every year and not a single metric ton of carbon dioxide.”  In my view, Exelon is a company that will be able to generate solid returns without having to worry about competition.

Since I belive that Exelon will be an overachiever for years, all I needed was a reasonable entry point for the stock.  Since Gross’s article was published, utility stocks and the market have been slightly positive, whereas Exelon has fallen about 4%.  I’m happier to buy the dip now, than to have chased earlier only to watch the stock fall.

The remaining question is, why has Exelon underperformed recently?  Perhaps an unlikely passage of a cap-and-trade bill hurt the stock.  Such legislation would have hindered carbon producing utilities, but not Exelon.  Another explanation could be that investors and analysts were disappointed with Exelon’s earnings on Friday.  To me, this can be disregarded since the fundamental earnings power of Exelon are unchanged over the upcoming years.

Pricecheck!

In contrast to some other utility companies’ price metrics (as I calculate), Exelon’s metrics look fairly consistent and stable.  Cash return, return on invested capital, and earnings’ returns all tell similar stories even though they use different inputs.  A juicy dividend every quarter is also reassuring.