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The mystery power company is... / Investors flee Russia / Quick Hits



July 25, 2008 – Comments (5) | RELATED TICKERS: EXC , MTL , UTX

Over the past couple of months I have been talking about my new found love for power companies, especially clean power companies with little or no exposure to coal that have large unregulated generation capacity (see post: Put a charge into your portfolio by playing this trend).  I like this sector for a number of reasons, including the fact that demand for power is growing in the United States while the number of power plants is not, the possible passing of some sort of carbon tax or cap and trade law by an all Democratic government, and the eventual introduction of plug-in electric vehicles. 

I have concentrated my investment in this sector in two companies.  The first, which I have already mentioned in previous posts is FPL Group (FPL).  The other company remained nameless because of Motley Fool trading restrictions.  Today I am finally allowed to talk about it.  The mystery company is...drum roll please...Exelon Corp. (EXC).  Exelon reported solid quarterly results which beat analysts' estimates this week (see article: Exelon 2Q profit up as nuclear margins improve).  This is just the sort of power company that I was looking for.  It's clean...its new Exelon 2020 plan will help it to become carbon neutral by improving its nuclear plants, building new gas, solar, and wind facilities, and increasing its energy efficiency...and it is buying back a ton of stock.  After repurchasing $500 million additional shares in 2007, EXC recently announced that it will repurchase another extra $750 million shares in 2008.  It doesn't hurt that Exelon has been a large donor to Obama's campaign either ;).  I expect both of these companies to produce market-beating results for the next several years.


While surfing around the big winners and losers on the markets yesterday I saw something strange.  The stock of a solid company, Russian coal and steel producer Mechel, getting absolutely pounded...closing down 38% and losing more than $5 BILLION in market cap on the day (see article: Mechel shares tumble 38% after Putin criticism).  Ouch.  I thought to myself that this must be some sort of mistake caused by the stock splitting or something because how on Earth could this stock get so crushed.  Well, the drop was legit.  Rissia's Prime Minister, good old Vladimir Putin, sharply criticized accusing it of gouging Russians by charging twice as much for its products at home than it does abroad.  As soon as they heard this, investors who had memories of Putin seizing the assets of the oil company Yukos back in 2003 ran for the hills. 

Not only did MTL drop nearly 40% on the day, but the Russian ETF RSX fell 6.2%.  The ETF is down more than two percent again today, but MTL has since bounced back nearly 14%.  While Russia is one of the hot "BRIC" countries everyone knows that there is high political risk for investors there so any whiff of trouble causes people to sell first and ask questions later.  As someone who has chosen to use NUE instead of MTL as my steel play (thank goodness) will watch this situation from the sidelines with great interest.

Vladimir Putin


Quick Hits (I know that this was short, but it's Friday afternoon so cut me some slack ;) )

- Minimum wage hike kicks in:  Higher costs for businesses = lower profits.

- United Technologies (UTX) Dividend Analysis:  A nice write-up on UTX, a company that I always keep an eye on but have never pulled the trigger on for some reason.  It has an amazing trackrecord of dividend and profit growth, growing both by more than 14% annually for the past decade.

Have a great weekend,



5 Comments – Post Your Own

#1) On July 25, 2008 at 3:55 PM, DemonDoug (31.52) wrote:

I'm a believer that min. wage is actually better for businesses as a whole.  Slightly more buying power for the poor means they have a few more pennies to spend, and since they are barely eking out a living as it is, it's likely they will spend it.  Also teens and kids having jobs often work for min wage and they also generally spend it.

I'll have to look up Excelon.  Looks like a really good opportunity.

UTX looks good, after I did a little write-up on it I realized after the fact that they are pretty well positioned in many markets.  They should do well, although buy price below 60, at 65 currently.

Did you see about GE's restructuring into 4 units?  Damn I wish I could just buy the energy and infrastructure units.  I still think there is going to be some serious trouble with their financial division which will drag down the entire company.  

Further quick EXC analysis: I like the fundamentals, don't like the P/E and share price and dividend yield right now.  It would have to get to at least below 70 before I'd think about bit, and in the mid to low 60s before I was really jazzed; a definite buy below 60 but the 52 week low is currently 64.73.  Just too rich over 80/share right now.

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#2) On July 25, 2008 at 4:06 PM, kdakota630 (28.97) wrote:

That's one of the reasons I won't put real dollars into anything Russian.  At least not for a long while.

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#3) On July 25, 2008 at 4:09 PM, LordZ wrote:

Careful or they might poison you with an radioactive plutonium isotope....


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#4) On July 25, 2008 at 4:12 PM, WillSurfForFood (65.83) wrote:

If I was a shareholder of a Russian company I would want to flee as soon as Putin started sharply criticising it, so yeah the drop in price is legit and is not without reason. I've been thinking for a while that Russia is probably a great place to invest because they have so much wealth coming in from natural resources. But if a company can come under such scrutiny by Putin for making too much money I will have to reconsider. I'm currently long Gazprom.

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#5) On July 25, 2008 at 4:33 PM, jester112358 (28.08) wrote:

Political risk is the single biggest factor in any foreign investment-and the hardest risk to estimate.  Because of commodities I felt Russia would be the strongest BRIC country this year, but I was fully aware of the political uncertainty associated with corruption in Russia and thus weighted them less than Brazil and Australia in my portfolio.  Though people are generally sanguine about Brazil's prospects and stability, even that, as investors with longer memories can remember, can change overnight.

That said, MTL, is no longer the best performing stock in my CAPS, nor in my personal portfolio.  Hence, the great truth in investing:  diversification.  Fortunately, I didn't overpay for it.  There are so many things we just can't know about any company.  I have no intention of selling or ending MTL or any of my steel and coal picks in my personal portfolio or CAPS though.  The demand trend from China and India will continue and might accelerate after the Olymptics due to the necessary rebuilding the damage caused by the earthquake.   That has been delayed due to the pollution issues associated with construction and the Olympics and is also the reason dry bulk shipping rates and activity have decreased in the last two months as the Chinese try to "clean up" their image.  As a company MTL has so many things going for them:  good vertical integration and thus inexpensive coking coal for steel production, lower shipping costs to Chinese markets, etc.  

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