A reader has requested that we give our unconventional take on a stock. Our analysis will not rely on the typical fundamental analysis since such work is a penny a dozen. However, our work on this topic may overlap with similar fundamental analysis.
The first thing that we notice about Exelon (EXC) is the all too familiar parabolic move in the stock price since 2002. This always begs the question, “when will entropy set in?” According to David Maranette, entropy (going from a state of order to disorder) is most present when a stock goes parabolic, the greater the degree of ascent the greater the subsequent collapse (disorder). Exelon is no exception in this regard, the rise and fall has been spectacular. The only question now is, how far to the downside.
The chart below depicts the relative change that has occurred between the Dow Jones Utility Index (^DJU) and Exelon (EXC). The run that EXC has had in comparison to the average “high quality” index of utilities seems inordinate. Especially when we consider that we’re at a historic low point for interest rates. Any sudden change of interest rates to the upside will decimate all utilities, especially those that have had an excessive run to the upside. As the market has adjusted the view on the prospects for EXC, the possibility exists that a swing to the opposite extreme is in the making for Exelon.
According to Dow Theory, EXC has the following downside targets:
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$27.84
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$18.68
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$9.47
Edson Gould’s Speed Resistance Lines [SRL] project the following downside targets:
Already, Exelon has declined below the conservative downside target of $40.02 and is presently on course to hit the $30.55 level. If EXC does not reverse course at the $30.55 level then the next downside target is $9.47. We’ve added intermediate reversal points where EXC could change direction if the stock were to decline to the $23.53 and $16.50 levels.
According to Value Line Investment Survey, EXC normally trades around 1x the per share dividend divided by the “interest rate” (1x $2.10/interest rate). Value Line doesn’t tell us by which interest rate we should apply to the company, so we have decided to apply the 30, 20, and 10-year U.S. Treasury rate (found here). The following are the mean prices that EXC would trade at for each interest rate scenario:
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30-year rate- $72.66
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20-year rate- $84.00
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10-year rate- $120.00
Based on the 30-year rate, EXC is selling 56.73% below the historical mean value. When a stock is trading at such an extreme level of undervaluation, we can only infer that there are more problems beneath the surface in spite of what is already known.
Keep in mind that we’re talking about a utility company with a price peak that, since January 1998, exceeded that of Dow Jones Industrial Average heavyweight IBM.
Although the prospects for Exelon could turn around, we’re concerned that there is more downside risk. We’d patiently watch what the fallout will be. At the very least, we’d like to see how close EXC comes into alignment with the Dow Jones Utility Average since 1998.
