Despite Underperformance, Exelon Remains a Recommendation

We know of no good reason why the stock should have done more poorly than the median power stock.  Some of the underperformance seemed to occur at the time of a warning on the earnings outlook.  The company revised its guidance downward modestly and wrote off some relatively unimportant telecom assets.

Perhaps some investors desired to reduce their exposure after September 11 to companies that owned nuclear power plants because they might become terrorist targets.  Honestly, practically anything can be a target.  We can't be more worried about a nuclear disaster now than when we first recommended the stock at the end of June.  Our position on nuclear disaster is that the prospects of it will keep us from building new plants.  But we are optimistic that the worst won't happen with existing plants. Yet should any serious trouble occur at a nuclear plant, it could be an indirect boon for natural gas as a fuel for electrical generation.  In that case, a loss in Exelon stock might be more than offset by gains in natural gas stocks in a diversified energy portfolio.

Investors in Exelon and other power stocks might take heart in a study by Richard Bernstein of Merrill Lynch.  As quoted in Barron's, the study finds that the dull S&P Utility sector outperformed the glamorous Nasdaq, since the inception of the latter index in 1971, by 12% per year compared to 11.2% per year.

Thus, having no new information that would cause us to change our mind on the long-term prospects for Exelon, we believe our own McDep Ratio analysis and regard the stock as an attractive value not just among power companies, but also among energy companies.  Nonetheless to present the Exelon idea in fresh terms, we recast it as half of a pair trade.