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Buy, Sell or Hold: Why NRG Energy Inc. (NYSE: NRG) is the Energy Sector’s “Triple-Threat” Profit Play

Horacio Marquez — Mon, 31 Aug 2009 15:00:39 +0000

If NRG Energy Inc. (NYSE: NRG) were an athletic prospect, scouts would rate it as a “triple threat.” That’s because the Princeton-based wholesale power generator is involved in all three of the key energy sources of the future: Solar, wind and nuclear.

And that’s only part of the reason I like this stock.

Growing profit margins and earnings momentum add to the energy company’s appeal – and a rebound in U.S. economic activity hasn’t even begun in full.

When NRG announced its second-quarter results a few weeks ago, the company said that its profits tripled from a year ago – eclipsing Wall Street estimates and setting a new record. It also boosted its earnings guidance for all of 2009, and increased its stock-buyback target from its previous $330 million worth of its shares to $500 million.

Income from continuing operations was $432 million – a marked improvement over last year’s $41 million loss. And its recent acquisition of the Texas retail-energy business of Reliant Energy Inc. [now RRI Energy Inc. (NYSE: RRI)] is starting to pay off.

In two months the tie-up has already delivered $200 million of the planned $400 million in adjusted earnings before income taxes, depreciation and amortization (essentially a cash-flow metric that professional investors refer to as “EBITDA”) gains for the year. With disciplined management this acquisition should outperform its estimated gains. This analysis is being recognized as we speak by the market, with unusual January call option activity in RRI stock last Friday.

NRG has interest in 44 power plants with 24,005 megawatts (MW) net ownership, most of which is in the United States. Plants in Texas and the Northeast account for almost 18,000 MW, giving the company positioning in fairly strong markets where environmental, but NRG also has operations in Australia and Germany.

The company distinguishes itself by having operating margins that are roughly double that of its peers – the product of its efficient fleet composition and prudent active energy price hedging policies. The hedges NRG currently has in place are likely to outperform analysts’ estimates, as well. That’s because no analyst wants to be caught over-estimating upside, especially in volatile markets like energy futures. So, Wall Street consistently undervalues the expected value of these hedges, which the firm carries on a mark-to-market basis. That was the case in the second quarter.

With respect to the economy, industrial sector inventories are very low, meaning they will need to be replenished in the third quarter. The government’s Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers,” gave a nice boost to industrial production, and some signs of stability and even some gains – let’s cross our fingers –can be seen in some areas of the housing market.

We’re by no means out of the woods, yet, but U.S. gross domestic product (GDP) did better than expected in the last quarter – shrinking by just 1% – and is likely to beat analysts’ expectations in the third quarter as well. That’s good news for NRG because the third quarter is traditionally the most profitable quarter of the year for utilities. Prices should firm up, benefiting this company’s already stellar return on investment (ROI).

And in addition to being well positioned to profit in the short-term, NRG is an outstanding long-term play because it’s ready to capitalize on the next stage of “green” energy development: low carbon emissions. After all, green is the color of money.

The company’s natural-gas, new and existing commercial nuclear, and new and very large wind-and-solar-power projects are sure to benefit longer term from the move towards environmentally-friendly forms of energy generation.

With total liquidity of $4 billion, NRG is in an impeccable position to develop its planned projects and take advantage of small opportunistic acquisitions, should they appear. The company has a very prudently managed balance sheet and a shrewd growth management discipline, which is an invaluable attribute in adverse economic conditions where cash is king.

And let’s say that all of these advantages that we have outlined here have not gone unnoticed by the competition: Two companies in the last three years have attempted to acquire NRG. Most recently, Exelon Corp. (NYSE: EXC) attempted to buy NRG outright. And even when the takeover attempt was rebuffed, NRG stock did not suffer. Exelon has since backed off from its acquisition attempt. That stock-price stability reflects strong investor confidence in management’s execution.

At Friday’s closing price of $27.50, NRG’s stock was still down about 30% from its 52-week high of $39.09 – just one of several reasons it still has room to rise, even after a scorching 91% run from its 52-week low of $14.39.

The stock is trading at a low 10 times forward earnings, has been consistently above its 200-day moving average since mid-July and is oversold by many proprietary measures. This stock could be ripe for a strong upward move as we approach the end of the year. What’s more important is that the intrinsic long-term value of the company is undervalued at these prices.

Recommendation: Buy NRG Energy Inc. (NYSE: NRG) at market (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in NRG Energy Inc.

Source:Buy, Sell or Hold: Why NRG Energy Inc. (NYSE: NRG) is the Energy Sector’s “Triple-Threat” Profit Play

Golden Opportunities and Your Options

Dr. Scott Brown — Tue, 31 Mar 2009 18:19:22 +0000

Our experts have cranked it up to high gear and have dug into some of the most controversial topics Investment U has covered recently. Like investing in gold.

Gold has been an incredibly hot topic over the past few months. On one side, it looks cheap from an inflationary perspective, and on the other, overpriced. Our own Louis Basenese even suggesting that we should consider shorting gold. The debate has ranged on our message boards pro and con…

But regardless of its short-term movement, we recommend holding 5% of any portfolio in precious metals – like gold. So what is the best way to accomplish this? We found a number of ways to do just that.

The Best Ways for Investing in Gold

Rick Rule, Chairman of Global Resource Investments, makes a compelling argument that gold isn’t a commodity in as much as it’s insurance. “Gold is disaster insurance. You shouldn’t want it to go up. Would you want to be paid in life insurance, home insurance, or auto insurance proceeds? That would mean you want to die, have your house burn down, or get seriously injured!”

Rick finds the notion that some people actually want gold to rise to $2,500 an ounce extremely distasteful. He believes the only thing gold has going for it right now is its volatility. It’s why he owns gold stocks.

There’s a few other ways for investors to own gold…

Physical Gold: Rick holds his physical gold in a bank safe deposit box. His is located at his half-year residence of Canada in the bank of Nova Scotia.
Paper Gold: The SPDR Gold Trust ETF (NYSE: GLD) is a good option for investors who need liquidity with their gold assets. You can buy and sell this ETF like any stock on the market. Which also means you can sell it short, if you believe it will fall.
Gold Coins: Gold coins are an easy way to own gold in your portfolio. Unfortunately, because of the demand, you’ll be paying a hefty premium to purchase them. This was discussed a little in our Panel Discussion, and we’ll have more for you on that dialogue tomorrow.
Gold Futures: Gold futures may be an excellent option for some. However, he stays out of gold futures because he believes it’s too volatile. Rick believes silver futures are even worse, like gold futures on steroids.
Gold Stocks: Gold producers trade between 1.7 and 2 times the net present value of their cash flows they could generate. It’s called the warrant on the gold price. Basically the market has assigned a large “growth” premium to a mining business – where the business gets smaller every day. There’s less and less gold to mine.

It also means that if gold went to $1,200 or $1,500, the cash flow these producers could generate would increase exponentially. However, this also works in the opposite direction. It’s why gold stocks are so volatile.

The second problem is that the gold industry as a whole has become greatly inefficient. Since the 1970s, when Nixon broke down the Bretton Woods monetary system to pay for the Vietnam War, gold prices have fluctuated from speculation from its controlled price of $35 to well over $800.

Rick explains it another reason why things are wacky with gold stocks. In a word, leverage. Imagine a $300 per ounce gold market where an inefficient producer mines gold at a cost of $320. That’s a negative 6% margin. If gold goes to $400 or above, there’s an infinite increase in profit, and better efficiencies on increases in price.

So ironically, Wall Street has wanted to see leverage in gold stocks to increase efficiency and make it easier to post stellar profits on gold rallies. It’s this leverage that’s also increased the risks and the volatility.

We had a considerable amount of interest in “profit generators” from Rick’s talk yesterday. People asked for more. So I talked with a few of the other experts to get their suggestions:

Out of Eurasian Minerals investment director, Scott Close suggested Esperanza Silver Corporation (CVE: EPZ).
Then Patrick Moodie of Rimfire Minerals was kind enough to recommend a few more: Riverside Resources Inc. (CVE: RRI), Almaden Minerals Ltd. (NYSE: AAU) and Cornerstone Capital Resources (CVE: CGP).

The Truth About Options

Karim Rahemtulla, Investment Director for Mt. Vernon Research, emphasizes that options have become much more popular because they are a tool to enhance returns. They are not just a way to go long or short. They are a way to use less money, protect, go long, OR go short.

Karim never thought he would see companies like GE fall into the single digits, and sees tremendous opportunity around him, “You can look at this market as a way to set yourself up for high profits, yet, with a degree of safety.”

LEAPs allow you to put very little of your capital at risk. These are long-term options, which are known as calls in shorter maturities. They let you go long – profit from increases in stocks – while putting only 15% to 20% of your capital on the line.

Then you get one, two, or three years of time to work on your side. In fact, there was one stock Karim suggested attendees look at (specifically, its 2011 LEAP) for that exact reason. Our audio recordings will have all the details. You can find out more, here.

He really emphasized that it’s easy to get confused with the complexity of options. It’s unfortunate, but it can be solved by focusing on a few simple option strategies:

Covered Calls – allow investors to receive a premium on the stock you own. When you sell a call you give someone the right to buy your stock at a specified price, called the strike price. If the cost of the stock never goes above that price, you keep the premium they paid you and you don’t have to sell.
Long Puts and Calls – Here you can use options to control fast moving stocks for a fraction of what it would cost to buy them outright. By buying a call, you have the right to purchase that stock at its strike price for a long time horizon. By buying a put, you have the right to sell at a particular price.
LEAPs - These are long calls with extremely long times to expiration. This allows you to control the stock for a fraction of the cost of outright purchase. You can also do these in your retirement account.
Put Selling – Here you sell an out of the money put on a stock that you don’t expect to weaken. If the stock doesn’t drop you keep the premium you take in.

Karim wrapped up with the three best strategies to use for the market right now: selling calls, selling puts and LEAPs.

Put Options: Getting Paid to Buy Your Favorite Stocks

Lee Lowell, from The Instant Money Trader, explained why so many investors on the sidelines are looking at put options as a way to buy back into this market.

The advantage of selling put options is that you get paid up front in cash from the put option buyer, which obligates you to potentially buy these quality stocks at below their current market prices.

There is a margin requirement involved. But it’s significantly less than what it would cost to buy the stock outright. And the total risks involved are no more than what it would take to purchase the stock outright.

Lee recommends selling put options that are either $5 or $10 out of the money that have three months until in expiration. There were three stocks in particular he recommended for this strategy right now: General Electric (NYSE: GE), Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC).

Racing Away…

Time has just been flying by over the past few days. Good people, great food and phenomenal market intelligence. We’ve hardly had time to catch our breath, so to speak. And just as I was thinking that, I ran into Keith Fitz-Gerald, Investment Director for Money Map Press.

Or more correctly, he ran by me. It seemed he was trying to catch a ride on one of the cigar racing boats in the harbor that I’ve been telling you about. As he stopped I asked him a little about the “Geiger Index” I’d heard so much about.

Apparently, it’s an algorithm he’s developed to monitor the market’s movements. It tips him off before big moves happen. I didn’t even have time to get more information out of him before he trotted off in search of cigar racing glory.

I didn’t have the heart to tell him the gusting winds we were receiving had cancelled most of the races. I will have my Editor in Chief, Alexander Wissel, send you some more information on The Geiger Index in the next day or so.

In many ways, this conference couldn’t have come at a more important point: With our new President, the markets recent plunge, the global upheaval and domestic economic disarray. As our last day closes out, the impression I get from many is that they’re more confident in what to expect based off of what they’ve heard over the past week.

And they aren’t the only ones. Even as an accredited finance professor, I’ve greatly expanded my knowledge this week.

Stay tuned for my wrap-up tomorrow, where in addition to touching on some of the biggest ideas and strategies from this week, I’ll give you an earful of the heated conversations from our panel discussions – which included green energy and gold coins…

Source: “Golden Opportunities and Your Options”

Calpine Rejects NRG Takeover Bid

Jennifer Yousfi — Mon, 02 Jun 2008 15:55:25 +0000

A merger that would have united the two largest U.S. independent power producers has hit a roadblock.Calpine Corp. (CPN) has rejected NRG Energy Inc.’s (NRG) initial offer, saying the 0.534 shares for each share of Calpine’s approximately 500 million shares outstanding is inadequate.

“I don’t think anyone should be surprised by Calpine’s announcement,” Gordon Howald, an analyst with Calyon Securities USA Inc. in New York, told Bloomberg News. Howald has a “buy” rating on NRG shares, but doesn’t own any. “If they were to accept the first bid as laid out, they would probably be doing their shareholders a disservice.”

Calpine has 60 power plants capable of producing 23,000 megawatts of electricity, while NRG maintains 49 plants with a total capacity of 24,120 megawatts. A successful takeover would double NRG’s capacity in the United States to about 45,000 megawatts, enough to power 36 million homes.

Despite rejecting the initial bid, Calpine stated it is examining whether “there is a basis for discussions between the two companies to explore a business combination,” The Associated Press reported. However, the company stressed that it’s possible no deal would ultimately result from the talks.

“We respect the Calpine Board’s decision but are disappointed that they have decided not to move quickly to deliver the benefits of our proposal to Calpine’s shareholders,” David Crane, NRG’s chief executive officer, said in a statement, Bloomberg reported.

The company remains interested in the deal, Crane added.

NRG would benefit from Calpine’s strong presence in California and its focus on cleaner burning natural gas. But there could be other interested suitors.

Other power companies that could throw their hat into the ring for consideration include Constellation Energy Group Inc. (CEG), Reliant Energy Inc. (RRI) and Mirant Corp. (MIR), James Halloran of National City Corp.’s (NCC) Private Client Group in Cleveland, an analyst who helps oversee $38 billion in assets, including about 13,500 NRG shares, told Bloomberg. A less likely possibility is Dynegy Inc. (DYN), Halloran added.

“There’s going to be a lot of negotiations in this,” Halloran said. “I think you’ll get at least one or two other possible bidders on it.”

Calpine shares closed up 25 cents on Friday, an increase of 1.10%, to close at $22.94. NRG shares also gained, closing up 87 cents for the day, an increase of 2.13%, at $41.68.

Source: Calpine Rejects NRG Takeover Bid