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Is Constellation Energy a Stock for the Long Term?

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Being able to retire rich, or at least comfortable, is the goal of almost any investor. However, it's much easier said than done. In a recent Wells Fargo survey, respondents between the ages of 50-59 said that they had, on average, about $29,000 saved up. With pensions all but gone, and Social Security targeted for cuts in the future, it's hard to count on anyone but yourself. But $29,000 isn't going to cut it for most people, so you've got to get involved in the stock market in order to grow that nest egg. Getting in the game is the easy part; choosing the right stocks is the hard part.

Making prudent decisions
Generally speaking, I look for four traits in a retirement stock:

  1. Valuation: Investors of all ages want to make sure they're not overpaying for a stock, but this matters even more in retirement. Retirees don't have the long time horizon that younger investors have, so it's essential to make sure you don't overpay in the short term.
  2. Dividends: Most retirees need a combination of both growth and income, as they'll be depending more and more on their portfolio to help with everyday expenses. Companies that pay dividends not only offer immediate income, but they've also proven to outperform non-paying dividend companies over long periods of time.
  3. Growth: Investors love dividends, but everyone wants to see their stocks rise over time. Growth can be as big a part of your portfolio as a steady dividend. It's important to note that you don't need a high-flying stock that's going to shoot to the moon; a company that can grow and outperform the market is hard enough to find, so steady growth is highly covetable.
  4. Low volatility: Retirees want to invest in great growth stocks just as much as anyone else, but they also want to be able to rest well knowing that their portfolio won't be taking them on a roller-coaster ride. At the end of the day, most retirees would rather own a sturdy company that lets them sleep at night than a company that whips up and down with the gyrations of the market.

Although some companies are definitely more geared toward retirees, which companies you choose to invest in will be dictated largely by what you already have in your portfolio. Small, mid, and large caps can all play a role in your investing strategy, so I chose to evaluate all varieties of stocks in this regular series.

So how does Constellation Energy stack up?
In order to check out the valuation of Constellation Energy (NYSE: CEG  ) , we don't want to look at only its P/E ratio, because it's not meaningful. That may seem unhelpful because it's hard to draw context for a company with no current P/E. However, if a company doesn't have a P/E, it's usually because it had negative earnings that year, which in itself tells us that something hasn't quite been right. Normally we'd look at the historical five-year average P/E and compare it to the current one, but since we don't have one, that action is rather fruitless.

Constellation Energy's dividend is 2.49%. This is tremendous; not only does Constellation Energy pay a dividend, but it pays more than the average company in the S&P 500.

Next, we want to ensure that Constellation Energy's stock has the ability to rise over the next five, 10, or 20 years. A company that's growing its net income has the best possible chance to see its share price rise over time. Of course, we can't predict the future, but we can look back to get an idea of how the company has performed in the past in order to try to ensure future earnings growth. Over the past five years, Constellation Energy has decreased its EBITDA by 0.9% annually. Unfortunately, Constellation Energy's earnings have shrunk.

One of the best measures of volatility is called beta. Beta measures the impact that the movement of the stock market will have on a particular stock. For instance, a beta of 1.0 signifies that Constellation Energy will move in tandem with the market; a beta of 2.0 means that the stock will move up twice as much as the general market, and vice versa. In this particular case, Constellation Energy has a beta of 1.2, which isn't necessarily outrageous, but it's not that low either. This beta falls in the grey area, and it really depends on each individual investor to decide how willing they are to take on that added volatility.

Let's look at the competition
We've taken a look at Constellation Energy, and maybe you think it's passed all the tests, or maybe you just don't feel comfortable with the results. Either way, it's beneficial to see how a company stacks up in its industry, because it's just as important to understand a company's competitors as it is to understand that particular company. Here are Constellation Energy's stats when compared to three of its closest competitors:

Company

Current P/E

Dividend Yield

5-Year EBITDA CAGR

1-Year Beta

Constellation Energy NM 2.5% (0.9%) 1.2
Exelon   (NYSE: EXC  ) 11.6 4.8% 4.3% 0.8
NRG Energy (NYSE: NRG  ) 41.7 0.0% 26.9% 0.9
NextEra Energy (NYSE: NEE  ) 14.5 3.8% 9.1% 0.6

Source: Capital IQ, a division of Standard & Poor's.

Each company has traits to like and traits left to be desired. Either way, it's beneficial to look at the industry picture and not just Constellation Energy in isolation.

Of course, I can't decide for you whether or not this is the best stock for retirement, but it has passed one and a half of the four tests, which shows that this stock has some promise. Depending on which traits are most important for you, you'd be wise to look further into this stock for your portfolio.

Interested in adding any of the companies above to your watchlist? Click below to get the latest commentary and analysis.

Jordan DiPietro owns shares of Exelon. The Fool owns shares of Wells Fargo and has created a ratio put spread position on Wells Fargo. The Fool owns shares of and has written puts on NextEra Energy. Motley Fool newsletter services have recommended buying shares of Exelon. Motley Fool newsletter services have recommended creating a covered strangle position in Exelon. 

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 25, 2011, at 12:42 PM, cooger72 wrote:

    Why is there no mention anywhere in this article of CEG's impending acquisition of EXC? That would seem to be a very important detail that has been completely left out. Please do better research or you risk misleading investors.

  • Report this Comment On July 25, 2011, at 1:05 PM, MJF260 wrote:

    You’ve got it backward’s Cooger. Exelon is doing the buying. CEG shareholders will receive .93 Exelon shares for each share of CEG; about 41.39 at midday today. CEG is going for 39.61.

  • Report this Comment On July 27, 2011, at 9:59 AM, cooger72 wrote:

    Whoops! I meant by EXC, not of. But the point is, in a year CEG won't even be trading, so shouldn't the article be about what the combined EXC/CEG will look like post merger and whether that would be worth owning long term? The article even mentions EXC as a competitor even though this time next year they'll be on the same team in all likelihood.

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