Utility Companies Showing Good Value Potential

Deep analysis of guru buys and institutional ownership

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Dec 28, 2016
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Among the market sectors, the utility sector has the lowest number of net guru sells during 2016. Utility companies also have good institutional ownership and low short interest. This suggests that gurus are least bearish on utility companies, suggesting that companies like Consolidated Edison Inc. (ED, Financial), WEC Energy Group Inc. (WEC, Financial) and ITC Holdings Corp. (ITC, Financial) have good value potential for early 2017.

A brief recap on institutional ownership and short interest

As discussed in a previous article, companies with high institutional and insider ownership generally outperform the stock market. Such companies, like Cinemark Corp. (CNK, Financial), likely have high institutional ownership as they offer good value potential to investors. The blue dots in Figure 1 show the average institutional ownership for the companies in each of the market sectors.

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Figure 1

Although the consumer cyclical sector has the highest average institutional ownership among the sectors, consumer discretionary companies generally have high short interest as the green bars indicate. On the other hand, the utilities sector has relatively low short interest and good institutional ownership, suggesting that gurus are relatively bullish on utility companies.

Guru trade behavior sheds light on good market sectors

As 2016 comes to a close, we can analyze the buy sell summary of gurus for 2016 to determine which sectors have good value potential in early 2017. A sector with high net guru buys indicates that gurus are relatively bullish on that market sector, while a sector with high net guru sells indicates that gurus are relatively bearish on that sector. Figure 2 summarizes the distribution of net guru sells across the market sectors for companies trading on the New York Stock Exchange and the Nasdaq.

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Figure 2

Based on Figure 2, the utility sector has the lowest number of net guru sells among the market sectors, suggesting that gurus are least bearish on utility companies. Figure 3 summarizes the distribution of the number of net guru buys among utility companies for the past three months, the past six months and the past 12 months.

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Figure 3

As illustrated in Figure 3, the distribution of net guru buys is roughly symmetric with a median of about 0.5. Two companies, including Consolidated Edison, had nine net guru buys during the year.

Consolidated Edison, a New York regulated electricity company, provides electricity and energy products to retail customers. Even though the company has modest financial strength and profitability, Con Edison’s operating margins and net margins are close to a 10-year high. The electricity company reported net income of $497 million during third-quarter 2016, about a $70 million increase from third-quarter 2015. CEO John McAvoy praised the company’s energy systems and employees for the high performance during the quarter, even when faced with significantly above-average temperatures. Likely due to the strong earnings performance, Con Edison’s operating margin outperforms 69% of its competitors as of December 2016.

The company’s institutional ownership generally increased during the 10-year period since January 2006 as illustrated in Figure 4, suggesting that gurus are relatively bullish on Con Edison. While the company has volatile short interest, the company’s short percentage of float seldom exceeded 8% during the past 10 years. Additionally, Con Edison’s short percentage of float has generally decreased since 2014.

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Figure 4

Three gurus invested in Con Edison as the company offers good value potential: Louis Moore Bacon (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Jim Simons (Trades, Portfolio). Simons purchased 105,200 shares, the largest stake among these three gurus.

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As of December 2016, both ITC Holdings and WEC Energy Group have a profitability rank of 9, suggesting high and sustainable profitability in the short term. Unlike Consolidated Edison, which only has a one-star predictability rank, ITC Holdings and WEC Energy Group have a predictability rank of at least three stars.

Since 2007, ITC’s institutional ownership seldom dropped below 90%, implying that gurus have been bullish on ITC Holdings during the past nine years. While the company’s short interest exceeded 10% during 2007 to 2009, the short interest gradually decreased to a 10-year low of 1.03% since then as illustrated in Figure 5.

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Figure 5

Even though WEC Energy Group’s institutional ownership averaged just 70% during the 10-year period, the institutional ownership increased 10% since 2015, likely due to strong earnings performance in recent quarters. During the third quarter, the Milwaukee-based utility company reported $217 million in net income based on generally accepted accounting principles, about $30 million higher than GAAP net incomes in the prior year quarter. The company’s customer base increased about 20,000 from third-quarter 2015 to third-quarter 2016.

Figure 6 summarizes the historical trend of institutional ownership and short percentage of float for WEC Energy Group.

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Figure 6

In addition to investing in Con Edison, Simons and Bacon also invested in WEC Energy Group. The former purchased 398,702 shares while the latter purchased a meager 3,530.

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See also

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Disclosure: The author has no position in the stocks mentioned in the article.

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