Power generators look poised for relief as O&G prices fall
Updated
A Mean-Reversion Play
Power generators like NRG and PNW have been quite beaten down lately, mostly because of surging oil and natural gas prices as we head into winter. NRG is .8 standard deviations below its mean, with 82% upside to its median price multiple of the last 3 years. PNW is currently trading about 3 standard deviations below where it usually trades in relation to its 200-day EMA, with 29% upside to its median price multiple of the last 3 years. In my opinion, NRG has more attractive fundamentals, but PNW has the more attractive chart. PNW looks particularly ripe for mean reversion here.
Fundamentals
NRG trades at less than 4 price to free cash flow (P/FCF), which makes it a really good value here. It has a forward P/E below 5 and a forward P/S below .4. S&P Global gives its fundamentals an average score of 87/100, and it has an average analyst rating of 8.7/10. It has 28% upside to the average analyst price target. Of the stocks I follow, NRG's price ratios are in the 92nd percentile, and its price-growth ratios are in the 62nd percentile. So it's cheap on both an absolute basis and when you factor in its rate of growth.
PNW's fundamentals are less attractive. The company has been cash flow negative for a couple years. Its price-to-earnings ratio is just under 14, and its price-to-sales ratio is just under 1.9. Its dividend yield is higher, at 5.4% vs. NRG's 3.8%. But it needs to generate cash flow in order to sustain that dividend. PNW's ESG score is really high, at 2.75/3. It gets just a 35/100 fundamentals score from S&P Global and a 4.7 average analyst rating, however, and it has only 7% upside to the average analyst price target. Relative to the other stocks I follow, PNW is expensive, in the 26th percentile for price ratios and the 11th percentile for price growth ratios. So this is probably not a long-term hold for me.
Open Interest a Contrarian Indicator
Open interest from options traders on NRG is quite bullish, with put/call ratio at 0.6. Open interest on PNW is bearish, with a put/call ratio of 1.4. However, I've recently done some back-testing and discovered that open interest is actually a contrarian indicator in recent data. So the bearish open interest on PNW actually implies a better short-term return. The extremely negative z-score I mentioned in the first paragraph also tends to be correlated with high returns in my back-testing. So my algorithmic trading account has gone pretty heavy on PNW, whereas in my discretionary account I am overweight NRG.
The Catalyst
Power generators have recently gotten crushed due to rising natural gas and oil prices, not to mention uranium. Because power generators are so heavily regulated, it's really hard for them to pass rising fuel costs along to their customers.
However, natural gas prices are down sharply off their highs, and oil and uranium both pulled back a bit today:
If this continues, power generators may fly. NRG looks to be finding some support, and I particularly liked the price action in PNW today.
Both NRG and PNW are coming off better-than-expected earnings reports, but NRG's results excluded some large costs related to winter storm Uri, and PNW reported several very unfavorable decisions from Arizona regulators.
Part of the reason for NRG's outperformance is that it was well hedged against rising fuel costs. NRG announced that it will raise its dividend by 8% in the first quarter of 2022 and that it is paying down debt at a pretty impressive rate as it works toward an investment-grade credit rating. NRG paid down $255 million of senior notes through September 30, 2021 and plans to continue reducing its senior notes balance through 2023. This is just a really well-run company, IMO, which makes it a good long-term hold.
Power generators like NRG and PNW have been quite beaten down lately, mostly because of surging oil and natural gas prices as we head into winter. NRG is .8 standard deviations below its mean, with 82% upside to its median price multiple of the last 3 years. PNW is currently trading about 3 standard deviations below where it usually trades in relation to its 200-day EMA, with 29% upside to its median price multiple of the last 3 years. In my opinion, NRG has more attractive fundamentals, but PNW has the more attractive chart. PNW looks particularly ripe for mean reversion here.
Fundamentals
NRG trades at less than 4 price to free cash flow (P/FCF), which makes it a really good value here. It has a forward P/E below 5 and a forward P/S below .4. S&P Global gives its fundamentals an average score of 87/100, and it has an average analyst rating of 8.7/10. It has 28% upside to the average analyst price target. Of the stocks I follow, NRG's price ratios are in the 92nd percentile, and its price-growth ratios are in the 62nd percentile. So it's cheap on both an absolute basis and when you factor in its rate of growth.
PNW's fundamentals are less attractive. The company has been cash flow negative for a couple years. Its price-to-earnings ratio is just under 14, and its price-to-sales ratio is just under 1.9. Its dividend yield is higher, at 5.4% vs. NRG's 3.8%. But it needs to generate cash flow in order to sustain that dividend. PNW's ESG score is really high, at 2.75/3. It gets just a 35/100 fundamentals score from S&P Global and a 4.7 average analyst rating, however, and it has only 7% upside to the average analyst price target. Relative to the other stocks I follow, PNW is expensive, in the 26th percentile for price ratios and the 11th percentile for price growth ratios. So this is probably not a long-term hold for me.
Open Interest a Contrarian Indicator
Open interest from options traders on NRG is quite bullish, with put/call ratio at 0.6. Open interest on PNW is bearish, with a put/call ratio of 1.4. However, I've recently done some back-testing and discovered that open interest is actually a contrarian indicator in recent data. So the bearish open interest on PNW actually implies a better short-term return. The extremely negative z-score I mentioned in the first paragraph also tends to be correlated with high returns in my back-testing. So my algorithmic trading account has gone pretty heavy on PNW, whereas in my discretionary account I am overweight NRG.
The Catalyst
Power generators have recently gotten crushed due to rising natural gas and oil prices, not to mention uranium. Because power generators are so heavily regulated, it's really hard for them to pass rising fuel costs along to their customers.
However, natural gas prices are down sharply off their highs, and oil and uranium both pulled back a bit today:
If this continues, power generators may fly. NRG looks to be finding some support, and I particularly liked the price action in PNW today.
Both NRG and PNW are coming off better-than-expected earnings reports, but NRG's results excluded some large costs related to winter storm Uri, and PNW reported several very unfavorable decisions from Arizona regulators.
Part of the reason for NRG's outperformance is that it was well hedged against rising fuel costs. NRG announced that it will raise its dividend by 8% in the first quarter of 2022 and that it is paying down debt at a pretty impressive rate as it works toward an investment-grade credit rating. NRG paid down $255 million of senior notes through September 30, 2021 and plans to continue reducing its senior notes balance through 2023. This is just a really well-run company, IMO, which makes it a good long-term hold.
Note
So far, so good. Price on both these picks has been creeping upward the last couple days.Note
PNW gained the 20-day EMA today. Note
NRG and PNW solidly outperforming the indices today.Note
Note
With natural gas prices plummeting, I suspect that NRG is poised to explode higher from here. I'd guess we get a gap fill to 39, at least.Note
Taking profit on NRG at 41.50. Overall, a very successful trade.
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