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

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

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

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:

• Should You Sell Consolidated Edison Right Now?
• How Cheap Is Exelon?
• 3 Reasons Dividend Stocks Are a "Must-Own"

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