During the second week of July we closed our long suffering position in Exelon. Our fundamental investment thesis on Exelon centered on the power generating company’s leverage to increased industrial demand as the U.S. economy exited the 2008-2009 recession, coupled with an increase in natural gas prices which could limit supply and provide improved pricing power in the forward power markets. For one reason or another, neither of those two sides of the equation ever materialized to our satisfaction.
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Exelon was owned by the Fund for approximately three years. Our average cost basis in the position was approximately $41.13. We exited the position at an average price of $33.15 for a realized loss of 19.40%.
However, the realized loss only accounts for the invested capital in the position. When we review the position from a total return perspective, we must include dividend income received during the holding period. On a total return basis including dividend income, the position suffered a 11.36% loss. Although this is clearly no consolation to a poor investment, we thought it worth mentioning.
Fundamentally, we continue to believe that Exelon is one of the cheapest utilities available, trading at just 8.5 times normalized earnings. Exelon’s ability to scale its wholesale power production capabilities with its retail distribution network offers value that we believe the investment market is not recognizing. Additionally, we still find attractive Exelon’s low-cost nuclear power plants that run year-round and can generate very generous profits. Exelon remains leveraged to rising coal and natural gas prices, perhaps more than any other utility. Although we no longer own Exelon, we will continue to monitor the company closely. At some point, we believe there may be an opportunity to reinitiate an investment in the company.
The opinions expressed are those of the Fund’s portfolio manager and are not a recommendation for the purchase or sale of any security.
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