Are utilities a safe investment?
Exelon Corporation’s (EXC) stock has been hammered in the last six years. In 2008, the stock was trading at ~$90 per share. Early this year, the stock was available at less than $27 per share. The huge fall in Exelon’s stock price is interesting. Investors usually see utility stocks as defensives.
Utilities’ stable earnings prevent stock prices from falling to low levels. Exelon is a large utility company. It’s deep correction challenges the notion of utilities being a relatively safe haven to invest in markets.
What went wrong for Exelon?
By 2008, Exelon seemed to be positioned better than its peers—like American Electric Power Company (AEP), NRG Energy (NRG), and Calpine Corporation (CPN)—to take advantage of soaring electricity prices in the U.S. It invested heavily to increase its nuclear fleet. It did this to keep fuel costs low. This aggressive move was backed by the assumption that electricity prices would keep increasing. A regulatory push for clean power will benefit Exelon going forward.
However, what Exelon didn’t anticipate was the drastic fall in natural gas prices. Natural gas prices fell from $10.2 to $3.5 per million per British thermal units (or BTU). This was a result of the supply increasing after the shale boom in the U.S. Also, demand fell due to the 2008–2009 recession.
Nuclear power plants lost their competitive advantage over natural gas power plants. Also, the setup costs for natural gas-fired power plants are low. Electricity prices deteriorated. Electricity demand fell as consumers braced for more efficient appliances. Environmental legislations slowed down. Growth was a priority.
All of these factors negatively affected Exelon’s growth and earnings. As a result, the stock continued to slide.
Exchange-traded fund (or ETF)
Exelon is in the top five holdings in the Utilities Select Sector SPDR (XLU).
Click here to learn why the utilities sector has underperformed in recent years.