The Big Money Says Don't Buy Exelon

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm don't really believe in the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: Exelon (NYSE: EXC  ) . Are institutions bullish or bearish when it comes to this Midwestern utility holding company?

Foolish facts

Metric

Exelon

Motley Fool CAPS stars (out of 5)

*****

Total ratings

1,576

Percent bulls

97.1%

Percent bears

2.9%

Bullish pitches

208 out of 216

Highest rated peers

E.ON AG, Atlantic Power, UniSource Energy

Data current as of Oct. 25.

Fools like Exelon for its meaty 5% dividend yield, which, if reinvested over decades, could grow to 20% or better. Heck, just holding could help you generate thousands of percentage points in returns.

But that's true of dividend investing in general. What makes Exelon interesting, Fools say, is its valuation and positioning. "Relationship with various energy interests, plus Exelon is the United States' largest nuclear power provider," Foolish investor yipeokia wrote last month.

With or without the nuclear catalyst, the stock appears priced for attractive returns. Exelon trades for a reasonable 2.6 times its tangible book value, yet produces a very strong 19.8% return on common equity. This is the sort of combination NYU professor Aswath Damodaran says can make for an attractive value in his book, Investment Fables.

Institutional ownership history

Top Owners

2007*

2008*

2009*

Latest*

Capital Research and Management

60,167,000

72,231,320

84,110,420

66,225,920

BlackRock

3,443,365

5,512,787

32,501,056

32,051,661

State Street Global Advisors

24,700,513

26,152,710

27,499,215

26,746,833

The Vanguard Group

19,964,671

21,490,194

23,129,164

24,729,760

Franklin Resources

3,650,756

6,707,034

8,117,724

15,958,062

TOP 25 TOTAL

234,029,158

229,572,646

271,938,967

280,396,218

Source: Capital IQ, a division of Standard & Poor's. *Indicates the number of shares owned.

On an annualized basis, the Big Money likes Exelon quite a bit. Funds bought big coming out of the Great Recession, and then added to their positions in early 2010. But as spring turned to summer, the top 25 institutional owners began to cut back. They sold 5.5 million shares between March and June, during which time the stock fell 12%.

Competitor and peer checkup

Company

Institutional Ownership

Insider Ownership

CenterPoint Energy (NYSE: CNP  )

66.19%

0.40%

Dominion Resources (NYSE: D  )

58.93%

0.39%

Duke Energy (NYSE: DUK  )

48.72%

0.25%

Exelon

62.94%

0.12%

FirstEnergy (NYSE: FE  )

74.23%

0.30%

Public Service Enterprise (NYSE: PEG  )

61.27%

0.09%

Southern Co. (NYSE: SO  )

42.91%

0.03%

Source: Capital IQ. Data current as of Oct. 25.

As you can see from this table, none of the big utilities boasts massive insider ownership. But among institutions, Exelon suffers the disadvantage of already being one of the most-owned stocks.

This isn't terrible, but it also isn't great. Outsized returns are the result of time and demand. Institutions fulfill the demand side of the equation when they pile into a stock, pushing up prices as supply becomes constrained. The more they already own, the less likely they are to keep buying.

So if you're interested in Exelon at current prices, buy it to reinvest the dividends as the stock vacillates in a tight trading range. You won't make much over the short term, but you'll be well-positioned when institutions make another run at the stock.

Now it's your turn to weigh in. Do you think the institutions are wrong about Exelon? Let the debate begin in the comments box below. You can also recommend other stocks for Tim to evaluate by sending him an email, or replying to him on Twitter.

For further Foolishness featuring Exelon:

Interested in more info on Exelon? Add it to your watchlist by clicking here.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Dominion Resources and Southern Co. are current Motley Fool Income Investor recommendations. Duke Energy is a former Income Investor pick. BlackRock and Exelon are Motley Fool Inside Value selections. Motley Fool Options has recommended subscribers write Exelon puts. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Exelon and is also on Twitter as @TheMotleyFool. Its disclosure policy is smarter than the average bear.


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