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Why Exelon Remains A Buy

Summary EXC has increased its presence in the regulated segment, with a focus on acquisitions. The EPA’s decision works in favor of Exelon. The company has a low valuation and good performance with a regular dividend payout. I have long been bullish on Exelon Corp. (NYSE: EXC ) given its clean energy portfolio, major presence in the U.S. utility market, low valuation, and dividend growth. The company has a market capitalization value of $27 billion and delivered revenues of approximately $27.4 billion in 2014. The company is engaged in the production, sales, and transmission of energy. The stock declined in line with other large U.S. utilities like Southern Company (NYSE: SO ), Dominion Resources (NYSE: D ), and Duke Energy (NYSE: DUK ). However, what gives EXC an edge when compared to the other utilities is its large fleet of green assets. Exelon Nuclear operates the largest nuclear fleet in the nation and the third largest fleet in the world. With the utility industry coming under increasing EPA pressure to reduce carbon emissions, EXC is set to outperform as its nuclear plants emit zero greenhouse gases. Furthermore, the company’s focus on regulated markets, its increased infrastructure improvements, increasing renewable energy asset base, and low valuation make it a buy in my view. Why I Like Exelon 1. Large, Clean Asset Base — The company operates a large low-cost and low-carbon generation fleet across the U.S. Exelon owns more than 35 GW of power generating capacity with less than 10% of its capacity coming from thermal power plants. The other utility companies are predominantly dependent on coal for their power generation. What I like about Exelon is its large clean asset base, which in my view is one of the biggest strengths of the company. It has one of the largest portfolios of solar and wind energy farms. Other than its large nuclear energy fleet, the company also owns and operates the following: More than 1.2 GW of the wind energy portfolio Exelon City Solar, the largest urban solar installation in the United States Four hydroelectric power plants 2. EPA Decision Taxing on Dirty Coal — The U.S. has already finalized its clean power plan , which focuses on cutting carbon emission from power plants. By 2030, the clean power plan will reduce carbon emissions by 32% below 2005 levels. All 50 states have utilities working toward establishing a cleaner and efficient power system using renewable energy. This decision by the EPA will be problematic for utilities relying on coal for their power production. 3. Good Dividend Yield — The company declared a regular quarterly dividend of 31 cents per share. Utility stock owners are mostly interested in a high, stable and growing dividend yield. Utilities attract investors for their stable dividend. If utilities’ stock prices fall, the dividend yield goes up. EXC has a dividend yield of 4.18%. 4. Focus on Regulated Markets — In the wake to overcome current weakness in the energy market, the company is slowly shifting its focus toward the more regulated segment of the market. The company has plans to invest $15 billion in BGE, ComEd and PECO (Exelon’s utilities) between 2014 and 2018. This will ensure stable earnings. Exelon is also expanding its footprint in the natural gas business. The company acquired Integrys Energy Group , with regulated natural gas and electric utility operations. 5. Lower Valuation — EXC stock has a P/B of 1.2x and P/S of 0.9x , which is lower than the industry average of 1.7x and 1.3x, respectively. The lower valuations are due to its lower operating ratios, compared to the general utility industry. Its operating margin at 15.5% is lower than industry average at 21.6%, while its net margin at 7.9% is also lower than the average. The reason for the lower margins is the company’s dependence on wholesale markets where prices have been low over the past few years. Its nuclear power plants have suffered from the low prices. The valuation multiples are also lower than the bigger utility companies. Market Cap ($ billions) P/S P/B Exelon 27 0.9 1.2 Dominion Resources 41.3 3.4 3.3 Duke Energy 48 2.1 1.2 Southern Co. 39.5 2.2 2 Source: Figures from Morningstar. 6. Good Recent Quarter Performance — The company reported a quarterly EPS of 59 cents per share, exceeding its guidance for Q2 2015. The company expects Q3 2015 earnings of $0.65 to $0.75 per share and has narrowed its full-year guidance range from $2.25 to $2.55 per share to $2.35 to $2.55 per share. Exelon has shown considerable improvement across all segments in quarterly revenues and net income when compared to Q2 2014, as can be seen below. (click to enlarge) (Note: Figures in millions.) 7. Exelon & Pepco Merger — In April 2014, Exelon announced its merger with Pepco Holdings, Inc. (NYSE: POM ) in an all-cash transaction. This would have led to the emergence of a leading Mid-Atlantic electric and gas utility. This was a good move by Exelon, as it would expand its regulated holdings and thus strengthen its earnings stability. It was a win-win situation for both companies. This merger recently faced heat from D.C. regulators. However, the companies will appeal the decision and analysts believe there is a 50-50 chance of the merger taking place. I think the merger should go through given its financial benefits for customers . Risks — Nuclear Base Risk While nuclear energy has its advantages in the form of no carbon emissions and low costs, it is still facing a lot of criticism worldwide given its danger of radiation accidents. However, Japan has recently restarted its nuclear power four years after Fukushima. Exelon spends nearly $1 billion annually on its nuclear plants to keep them operating safely and reliably. — Increasing Bond Yields Utility stocks can lose their attraction to yield investors as long-term bond yields rise. With the Federal Reserve expected to raise interest rates this year, bond yields are likely to increase. This will pressurize utility stocks that have benefited from the zero rate interest environment in the past few years. Stock Performance The stock is currently trading at $31.5, which is higher than its 52- week low. The company has a market capitalization value of more than $27 billion. The stock has lost 17% of its value since 2015 . Conclusion Exelon will benefit from the increasing demand for clean electricity in the near future. Though the company is facing various economic challenges in the form of low natural gas and power prices, it is trying to cover up its weaknesses through investments and M&A opportunities. The new EPA rules will improve EXC’s competitive position as compared to other utilities. I remain bullish on the stock given its growing commitments in the regulated markets, its large, clean asset base, its low valuation, and its good dividend yield. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Balanced Investing For Balanced Living

In the market’s never-ending story, we never know how its most recent action will play out. One thing we do know is that when the market is more volatile than usual, investors who lack a personalized, long-term plan to guide their way are far more likely to make the wrong moves by the time the cycle is complete. In our opinion, every investor’s long-term plan should include embracing a buy, hold and rebalance approach to investing. This is one of the simplest and most effective ways to diversify, and it may help you prosper in various financial markets over the long term. To achieve this goal, a portfolio is initially allocated based on each investor’s needs across different asset classes, such as stocks, bonds and real estate. The portfolio mix is then maintained by periodically rebalancing. Winning investments are pared back, and underperforming investments are increased during a rebalancing. A rebalancing can occur on a specific date, such as a birthday or anniversary, or it can be done using a percentage of asset method. See my book All About Asset Allocation for a detailed discussion of rebalancing techniques. Figure 1 is an illustration of rebalancing using a 50% stock and 50% bond allocation. When stocks gain versus bonds, their percentage or allocation becomes too large. Shares of the stock investment are sold, and the proceeds are reallocated to bonds. This serves as a risk control mechanism for the portfolio. Another effective way to rebalance is to employ new dollars when they are available. For example, if you were to receive a modest lump sum of cash , you could use it to “feed” the portion of your portfolio that requires additional assets. If you were underweighted in bonds, for example, you could apply the new dollars there. This helps you rebalance, while minimizing the transaction costs involved. Figure 1: Rebalancing a 50% stock and 50% bond portfolio (click to enlarge) (Chart by R. Ferri) Some financial pundits criticize a balanced approach. They say a buy, hold and rebalance strategy is simple-minded and a relic of the past. Often, their solution is to be tactical, meaning they suggest that investors aggressively move in and out of the markets in an attempt to avoid the worst returns and capture the best ones. As it turns out, the data suggests that more than half the experts fail to time the markets correctly ; their portfolios are expected to fall short of the simple strategy they mock so much. Consider Figure 2, which illustrates the returns of a portfolio initially allocated to 50 percent in stocks and 50 percent in bonds from January 1, 2007 through August 31, 2015. The period begins just prior to the worst bear market in recent memory, and includes a surge in stock prices that occurred in the years thereafter. The proxy for stocks was the CRSP Total Stock Market Index, and the proxy for bonds was the Barclays Capital US Aggregate Bond Index. Both indexes hold broad representations in their respective markets. The 50/50 portfolio was rebalanced monthly; annual rebalancing works just as well. Figure 2: Comparing a 50/50 Bond/Stock Portfolio to Each Index (click to enlarge) (Source: CRSP and Barclays Capital data from DFA Returns Program, chart by R. Ferri) At least on paper, every stock investor lost portfolio value during the crushing bear market that began in October 2007. Prices were down nearly 60 percent from peak to trough. A 50 percent stock and 50 percent bond portfolio was down about 20 percent from the peak. Even a portfolio holding only 20 percent in stocks didn’t escape the bear, and was down about 5 percent by the time the market hit bottom in March 2009. Still, Figure 2 shows that the 50/50 diversified, rebalanced portfolio fared quite well during the bear market and the recovery that followed. The return hasn’t matched a 100 percent stock portfolio over the entire period, but the volatility was considerably lower – and volatility matters! Investors who assume the party will never end and take on too much equity risk when the markets are surging upward over extended periods run the risk of capitulating in the next bear market. They often lack a disciplined plan to see their way through, and may never fully recover the realized losses they incur after selling. Lower volatility created by a disciplined allocation to stocks and bonds helps keep you invested during all market conditions. Ideally, our crystal ball could tell us to get out of stocks before the crisis, but realistically, no one knows what the market is going to do in the future. We invest in stocks because in the long term, the returns are expected to be substantially better than those from bonds. We need this growth just to stay ahead of inflation and taxes. Patience is a virtue, though. Bear markets occur without warning; bull markets often follow on their heels with equal unpredictability. And so on, and so forth. Only those with discipline throughout can expect to build wealth according to a rational course, rather than depending on random and very fickle fortune to be their “guide.” Balanced investing is part of balanced living. A buy, hold and rebalance strategy using broad market index funds is one of the simplest and most effective ways to diversify and prosper over the long term. It helps keep us sane and our portfolios more reliably on track during good times and bad. Disclosure: Author’s positions can be viewed here .

Built For Action

We humans are doers. We want to move, to make, to accomplish, to act. We do not take kindly to sitting idly by. We do not enjoy being bored and most of us struggle to sit quietly alone. It is increasingly easy to distract ourselves, to push away the quiet. Unless I’m asleep I am within arm’s reach of my phone about 95% of the day. Why sit quietly when Twitter and Instagram await?! Last year I read 10% Happier: How I Tamed the Voice in my Head by Dan Harris (at the recommendation of this post by Shane Parrish at Farnam Street). It is a great reflection on the difficulty of our busy lives and our ability to focus and slow down. Harris, after having a panic attack on national television, explores a path towards meditation and trying to relieve his anxiety. In doing so, he finds that meditation is hard. It’s really hard. Sitting and trying to focus on a single thing (typically breathing) without being distracted by thoughts of work, family, hobbies, to-do lists, dentist appointments and everything else. We are just not very good at doing nothing. This is especially true as investors. And we really don’t like it when are portfolios do nothing. We’re sitting in the doldrums right now. Returns everywhere are nowhere. Here’s a quick rundown of 12-month returns through 9-15-15: S&P 500: 1.77% Russell 2000: 3.05% Barclays Aggregate Bond: 2.32% MSCI EAFE: -6.34% MSCI Emerging Markets: -23.58% US Real Estate: 1.89% Other than Emerging Markets being pretty painful, those are some pretty unexciting numbers. A weighted average of those for a balanced investor is probably going to put you in the -3%ish range for twelve months. A little painful, but probably not panic-inducing for most. And yet, it itches. You get your statement and look at the numbers and it just tickles your nerves a little bit. “Should I do something?” it asks. “What’s not working?” it wants to know. “Have I made a mistake?” “What should I do?” “How do I fix it?” They are quiet questions, but there they are, lingering in the back of our minds. We only get one chance at this investing thing, and we’re terrified that we’ll get it wrong. We’ll miss out on opportunities or hire the wrong advisor or buy at the wrong time or have to listen to our brother-in-law at Thanksgiving talk about how he nailed it AGAIN this year. Hopefully, we have the other voice too. The calm, rational one that reminds us that we have a plan. A pretty well-thought-out plan. A plan that involves boring years and periods where returns don’t meet our expectations. This voice should remind us that we knew about that going in. It doesn’t necessarily make it easier to remember that, but it ought to handcuff us. Even though we simply hate to do nothing, we should. We are not built for it. We are built for action! If it looks broken, fix it! The problem is that what “looks broken” to us is based on our desperate need for immediate gratification and split-second feedback about our decisions. But split-second feedback makes us absolutely terrible investors. In the moment, we can’t take the long view, so we need to listen to our past selves about why we made the plans we did and how we already know what to do in these situations. Generally: nothing.