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Are Merchant Power Stocks Really Worth the Risk?

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Price targets

Despite posting a loss in the fourth quarter of 2015, the majority of analysts are positive on NRG Energy (NRG). According to analysts’ estimates, NRG Energy has a handsome upside of ~68% in one year with a price target of $18.13. NRG is currently trading at $10.80.

Of the 16 analysts tracking NRG Energy, 12 recommend it as a “buy” while three recommend it as a “hold.” One analyst has a “sell” rating on NRG Energy as of March 1, 2016.

The chart below shows analysts’ recommendations for NRG Energy. Interestingly, two analysts have given a price target of $30 for the company. This target implies an estimated upside of 200% with a holding period of just one year.

As for its peers, Calpine Corporation (CPN) has an estimated upside of 60% with a price target of $20.50. It is trading at $12.56. Dynegy (DYN) has a price target of $21.50, which implies an estimated gain of 115% with its current market price of $10 as of March 1, 2016.

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Outlook

NRG Energy’s management said in its 4Q15 earnings call that it is reintegrating its solar business for industrial and commercial customers back into NRG Energy. However, the company is still thinking of strategic alternatives for its home solar (TAN) and electric vehicle charging segment. This segment has been dragging NRG’s earnings for the last few quarters.

Weaker commodity (DBC) prices may continue to dampen wholesale power prices, influencing NRG’s earnings. Appropriate hedging and expanding retail business can partially offset the risk.

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