Author: James Hofmann
Covestor Model: Dividend Growth
Disclosure: Long EXC
Commentary for January, 2011
Fitting into my general macro thesis of a continued bull market in commodities and our focus on conservative dividend value, I was trying to figure out a way to play this trade. I started thinking nuclear power. If energy prices rise, you would naturally suspect utilities using commodities could get squeezed as they may have a hard time passing the costs onto consumers fast enough to preserve margins. This, however, would not be the case with a nuclear power plant, as its costs would remain the same, yet it could raise prices since its competitors will be and thus benefiting from a margin expansion.
After screening the sector, I stumbled upon Exelon (EXC), the largest producer of nuclear energy in the United States. As we suspected, they have some of the best margins in the sector. Using their last fiscal year numbers, they have a healthy gross margin, operating margin, and a profit margin. That’s what I call pricing power. They are currently trading on a current earnings multiple of around 10.4 and is currently yielding nearly 5% dividend-wise (Morningstar 12/29/10, http://quote.morningstar.com/stock/s.aspx?t=exc). I will continue to build on this position as I see upside in the space and name.
Generally for 2011, I see continued upside in the equities market. I see the S&P trading higher for the year and once again, I believe there will be over performance for heavy dividend payers as the yield on the 10-year is low. I believe we will see bond prices fall as investors leave the safety of bonds for equities and thus we will benefit in the form of equity appreciation. I think our economy is off to a slow start, but it is starting up and that’s an enormous positive for the markets.
I feel very good about the current portfolio and I am looking forward to another strong year in 2011.
