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December/January 2014 Picks

Five offerings deemed to be right for right now.

Morningstar Analysts, 12/16/2013

Stock: Exelon EXC
Fair Value Estimate: $42
Morningstar Rating: 5 Stars
Uncertainty: High
Economic Moat: Wide
Forward P/E: 10.6
Market Cap: $24.1 billion

Exelon’s primary business as the largest U.S. nuclear power plant owner long has been a profit machine and an industry-leading source of shareholder value creation for the company. But power prices have crashed hard since their 2008 highs and appear stuck at current levels for at least the next two or three years. That has resulted in a sharp drop in Exelon’s returns. But the low operating costs and clean emission profile of its nuclear fleet make Exelon the utilities sector’s biggest winner if our outlook for higher power prices and tighter fossil fuel environmental regulations materialize. Exelon’s world-class operating efficiency ensures it will be able to capture that upside. Travis Miller

Mutual Fund: Dodge & Cox International DODFX
Category: Foreign Large Blend
Morningstar Rating: 4 Stars
Morningstar Analyst Rating: Gold
Expenses: 0.64%
Minimum Investment: $2,500 
Total Assets: $51.5 billion

Dodge & Cox is in some ways a stodgy firm. Its long-tenured investment team typically sees little turnover, it goes decades without launching new funds, and its managers buy and sell stocks at a glacial pace. But this fund is no shrinking violet. It will buy beaten-down fare and keep adding to positions on the way down if the team is convinced it’s right, and the fund often owns a hefty stake in emerging-markets stocks. (Its weighting was recently triple the foreign-blend category norm.) So, the fund isn’t for the faint of heart. But while its returns can be volatile, the fund has generated an excellent long-term record. Greg Carlson

Separate Account: Luther King Capital Management Equity
Morningstar Category: Mid-Cap Growth
Investment Style: Mid-Cap Growth
Morningstar Rating: 3 Stars
Total Number of Holdings: 38
Annual Turnover: 65%
Total Strategy Assets: $643 million

This strategy’s conservative take on large-growth investing tends to shine in tough times. Lead manager Luther King and the veteran team backing him focus on companies that generate sustainable high returns on invested capital without taking on too much leverage that they can hold for years (annual portfolio averages just over 20%). They also diversify the portfolio broadly, often stashing less than 20% of assets in the top 10 holdings and typically avoiding big stakes in a particular sector. The result has been strong risk-adjusted results over the long haul. If the stock market stumbles after its big run since the start of 2012, this strategy should hold up relatively well. Greg Carlson

Closed-End Fund: Nuveen Diversified Currency Opportunities JGT
Discount: 15.3%
5-yr Average Discount: 11.8%
Modified Earnings Rate (Share Price): 5%
Distribution Rate (Share Price): 9.6%
Average Daily Value: $1.84 million
Effective Duration: 1.19 years

For those investors looking to gain emerging-markets currency exposure, JGT is a cheap option. This portfolio is positioned for the long-term depreciation of the U.S. dollar, with nearly three quarters of net exposure to emerging-markets currencies. The fund has a Morningstar Analyst Rating of Neutral, but its real draw is its valuation: The double-digit discount as of October was notably below its five-year average. Even though the 9.6% distribution rate at share price is composed largely of return of capital, the wide discount makes this accretive for shareholders. In all, this should be treated as being closer to 5%. Steven Pikelny

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