Shorts Beginning to Sniff Around NRG Energy

Founded in 1989, the Princeton, NJ based NRG Energy (NRG) focuses on power generation for the wholesale market. It also trades and markets energy and various energy-related products. As of now, the company generates its power primarily from baseload, intermediate, and peaking facilities, as well as from thermal energy production and energy-resource recovery plants.

I’ve said in earlier blogs that as oil prices soar, we are going to see more money to be made in alternative energy. NRG is covering its bases. As of late, NRG has been looking into greener types of energy production; in July it acquired Padoma Wind Power, marking NRG’s first venture into the wind-power industry. According to NRG President and CEO David Crane, this is part of a larger strategic move by NRG, which wants to build a larger “multi-fuel multi-region business model.” The company has also been reportedly looking into ethanol; according to the Associated Press, this would make NRG one of the first power companies to invest in an ethanol plant.

Right now the company is trading near $50, close to its 52-week high of $52.61. I do think the company has a promising future, but it is not the right time to buy. I understand from the grapevine that some "shorters" are eyeing the company's stock.

After a rough 2005, earnings are back up, and the first two quarters alone have already produced almost as much revenue as all of 2005. Moreover, the second quarter of 2006 saw earnings almost 50% higher than the first quarter (though NRG’s margins are still horribly slim at 2.22%). The continuing demand for energy should drive revenues, and NRG is smartly looking ahead to diversify its production sources in a way that should help both revenues and margins down the road.

Type of stock: An energy company that is diversifying its power sources to remain profitable in the twenty-first century.

Price target: Given that the company is currently trading close to its 52-week high, I would beware and hold off from any purchasing. A friend of mine told me that some "tough shorts" were eying NRG...better not to try to outsmart a rumor. So, don't jump in until you see this solid company's stock back in the $30's or unless you are prepared for a bumpy ride.

NRG 1-yr Chart