Heartland Advisors, an investment management firm, published its “Heartland Mid Cap Value Fund” third-quarter 2021 investor letter – a copy of which can be seen here. Security selection was mixed with holdings in Real Estate and Financials leading on the upside, but the Strategy lagged its Russell Mid Cap® Value Index benchmark for the period. Holdings in Materials detracted from relative performance. The portfolio continued to outpace its benchmark year to date through September 30. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Heartland Advisors, in its Q3 2021 investor letter, mentioned Exelon Corporation (NASDAQ: EXC) and discussed its stance on the firm. Exelon Corporation is a Chicago, Illinois-based nuclear electric power generation company with a $49.9 billion market capitalization. EXC delivered a 20.96% return since the beginning of the year, while its 12-month returns are up by 21.02%. The stock closed at $51.07 per share on October 21, 2021.
Here is what Heartland Advisors has to say about Exelon Corporation in its Q3 2021 investor letter:
“Power aid. A renewed interest in less-volatile industries and income-generating businesses helped propel less volatile names in areas such as Utilities. Our holdings in the sector were up modestly during the period and outperformed the benchmark on a relative basis, led by Exelon Corp (EXC).
The company is a large multi-state utility with regulated as well as unregulated operations. Following a strategic review, Exelon announced a plan this year to separate the two businesses. Since the time of the announcement, investors have gotten a clearer view into prospects of both operations and have seen improvements in results, and shares have appreciated. The decision and recent improvements, in our view, set the stage for a further re-rating of the company.
Based on our analysis, investors appear to be undervaluing Exelon’s two business lines under the current operating structure. We believe the regulated line has desirable transmission/distribution assets and strong opportunities for rate base growth. Meanwhile, the unregulated merchant power segment trades at less than 5x enterprise value/earnings before interest, taxes, depreciation, and amortization, which represents a steep discount to the average multiple for publicly traded power companies.
We also believe Exelon’s merchant business, with its nuclear fleet and an inventory of alternative energy assets, is poised to benefit from an increased emphasis on clean energy from the Biden administration.
With shares trading at a discount to our sum-of-the parts analysis, Exelon, in our view, remains a compelling opportunity relative to fully regulated utilities.”
Based on our calculations, Exelon Corporation (NASDAQ: EXC) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. EXC was in 35 hedge fund portfolios at the end of the first half of 2021, compared to 44 funds in the previous quarter. Exelon Corporation (NASDAQ: EXC) delivered a 9.78% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.