NRG Energy Soared 7% on October 18—What’s Next?
Leading merchant power player NRG Energy (NRG) saw one of the highest rises of the S&P 500 Index on October 18, 2016. It rose 6.7% and closed the day at $11.71. The Utilities Select Sector SPDR ETF (XLU) rose nearly 1%, while the broader market (SPY) managed to rise nearly the same amount.
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Nearly 9.8 million total shares of NRG were traded on October 18, more than double its three-month average volume. NRG probably surged due to remarks about the stock’s undervaluation made by Morgan Stanley and Avenue Capital Group chair Marc Lasry.
Why NRG may not be as strong going forward
NRG Energy has been under immense pressure in the last couple of quarters due to persistent weakness in wholesale power prices. This added to NRG’s woes when periodic surges in natural gas prices couldn’t also boost power prices. NRG’s volatile earnings in the last couple of quarters were reflected in its volatile stock movements.
NRG has vanished investors’ capital in the last few months. It has corrected more than 50% since early June 2016, while utilities at large have corrected nearly 2% in the same period.
NRG’s stock has definitely become cheaper in the past couple of months, but investors may overlook this due to the fundamental flaws at play. NRG is currently trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 7.7x, while the industry average for merchant power players is ~9x.
In comparison, broader utilities (XLU) have also become cheaper due to their ten-day fall. They’re likely to offer attractive risk-to-reward propositions compared to NRG.