01/21/2005 12:00 am EST
Elliott Gue and Ivan Martchev have turned their skills to an exciting new weekly trading service, Advantage Bulletin. Here, they look at two opportunities in the nuclear sector—one, a low-priced speculative play in nuclear waste, and the other, a large-cap utility."Exelon (EXC NYSE) is one of the largest utility companies in the US. It's primarily a generator of nuclear energy-nukes make up between 60% and 70% of the company's total generation capacity. All utility companies hold a fair amount of debt. This isn't necessarily a problem because the traditional utility business is a solid cash generator— under most normal circumstances, these companies should have little trouble covering their debt service. Exelon actually has a cleaner-than-normal balance sheet with a debt-to-equity ratio of less than 1.5 against an industry average of 1.9.
"The company generates more than $2 billion in annual free cashflow— nearly 10% of its market capitalization annually. This is enough to suggest there's upside in the annual dividend on top of its already impressive 3.7% dividend yield. Lately, money has been flowing out of the riskier small cap and speculative stocks and into larger, more stable plays. While there are plenty of short-term opportunities in smaller, momentum names, stocks like Exelon should benefit from the longer-term flow of institutional money.
"We like Exelon's focus on nuclear power. Many thought nukes were passé just a few years ago, but with oil and natural gas prices spiking rapidly, nuclear is actually a very cheap way to generate power. Exelon isn't as sensitive to swings in energy pricing as some of its peer group. Already, several companies are planning to build new nukes-we expect Exelon to be among them. The company is working through regulatory red tape surrounding its proposed purchase of Public Service Enterprise Group. When that deal is consummated, we expect it to be a good deal for Exelon. With a friendly Federal Energy Regulatory Commission in place, required divestitures should also be minimal.
"Technically, Exelon is in a strong uptrend. Volume has tended to be extremely high on rallies and lighter on selloffs. The stock just recently tested its 50-day moving average and held, giving us an excellent buying opportunity. Buy under 45, for an estimated holding period of eight to 12 months. Our target is 50, an 18% gain (closer to 23% with dividends). Investors should set an initial stop at 39.93, and trail the stop higher as stock rallies
"As a more speculative play on nuclear power, we would recommend Perma-Fix Environmental Services (PESI NASDAQ). Perma-Fix treats, stores and disposes of all sorts of commercial wastes, including nuclear waste. The fundamentals for the company's nuclear waste division are strong and management seems focused on revenue growth in this segment. The company has contracts to dispose of waste from both the Department of Energy and large, commercial customers. The Industrial waste division has seen less impressive growth, but Perma-Fix has done some restructuring including shutting down an older, underperforming subsidiary.
"Technically, the stock broke above its 200-day moving average on good volume about a month ago, then retested that average. It's now breaking higher again on strong volume. Traders may be looking at this company as a back-door play on the growth in nuclear power generation. We would warn investors and traders that Perma-Fix is a volatile small cap issue. Fundamentally, the stock has been experiencing losses for some time. While we like the story as a trade, subscribers should recognize the elevated risks and adjust their position sizes accordingly. The stock is a speculative buy under 2. Our suggested holding period of two to three months, for a move to $3.25— a potential gain of 70%. Traders should set an initial stop at 1.54, and trail the stop higher as the stock rallies."