Business

"The uncertain market has changed our risk appetite and shifted our focus to stocks deemed safe enough for even the most conservative investors," says Jonas Elmerraji.

The editor of The Rhino Stock Report suggests, "Among them are regulated utilities, including our latest recommendation -- NRG Energy (NYSE: NRG), which is involved in wholesale power generation."

"Investors have long favored utilities for a few very good reasons: predictable, recession-resistant revenues; steady streams of dividends; and government-sanctioned monopolies.

"They’re a safe haven for stressed investors in the midst of a recession. But while much of the retail stock buying focuses its attention on the predictable utility stocks, one deeply related and highly profitable niche is being left to the wayside -- wholesale power generation.

"Many people don’t realize the fact that power companies don’t own all of this country’s power generation facilities. A different class of utility stocks, known as wholesale power generators, engages in turning commodities like coal, oil, and natural gas into energy.

"NRG Energy is one such company. This generation firm operates 48 power generating facilities internationally using coal, oil, natural gas, nuclear, and alternative fuels.

"In the aggregate, the company is controls facilities that generate enough energy to power between 4 and 8 million U.S. households. And unlike most of its peers, NRG is actually in the process of constructing additional generation capacity right now.

"In the highly leveraged power generation industry, NRG is a best-in-breed stock with phenomenal operating metrics and a strong balance sheet, all at a relatively cheap price.

"In spite of difficult economic conditions and a decrease in power demand, the company closed a record year in 2008 with net income of $1.2 billion. 

"That huge income number was thanks in part to prescient hedging amid rising commodity costs, something that the company has proved itself very capable of since it emerged from bankruptcy proceedings in 2003 in the wake of an Enron-induced collapse of the unregulated utility space.

"Since then, with a management team headed by energy industry veteran David Crane, the company is preparing to enter a new decade with a markedly different financial footprint.

"And NRG is stepping up to the demands of that new decade by embracing alternative energy sources like solar thermal, and wind power – and keeping them monetized. The company owns generation capacity in California, New York City, Texas, Europe, and Australia. 

"From a financial perspective, NRG is an attractive buyout candidate – and the company knows it. The company turned away a $7.5 billion takeover offer from Exelon in October of 2008, as well as a $7.9 billion pre-crash offer back in 2006 from Mirant. 

"Both of those unrequited merger opportunities are telling about NRG’s management, which learly believes that the company is on the path to be worth considerably more on its own in the intermediate term. I’m inclined to agree.

"NRG’s profitability isn’t the only thing that makes this stock attractive right now. The company is also making a very enticing value case for investors who aren’t afraid of going long in this market.

"With a price-to-earnings ratio of 5.96, NRG investors are paying 88% less for this company’s earnings than for those of its industry peers. That’s thanks in large part to a nearly 20% slide that shares have taken since an analyst downgrade to 'Hold' in early October.

"That 20% discount in price has lead to some interesting valuation metrics – like a price-to-book ratio of 0.8. A P/B that low is nearly unheard of for asset-centric industries like power generation.

"On a per-share basis, NRG sports $31.46 in net assets, of which nearly $6 per share is quick, liquid assets. All told, the company has $4 billion of liquidity, and enough hedging in place to ensure that its cash needs are more than adequately covered through 2010.

"Shares of NRG look attractive from a technical standpoint as well. With most indicators showing the stock as oversold right now, and shares sitting right above support, now should turn out to be a great time to pick up a stake in NRG.

"Like most stocks, NRG is highly susceptible to the market’s recent mood swings. However, with shares otherwise perfectly aligned fundamentally and technically, this play looks ready to dive into right now. We’re adding the stock to our model portfolio."

Today’s tickers: ACL, VIX, FEED, ODP, NRG, NVTL, LVS & MSTR

ACL - Alcon, Inc. – Medical supplies producer, Alcon, attracted long-term bullish option traders to the May 2010 contract. Shares slipped slightly lower by 0.5% to $144.02 by noontime (EDT). It looks as though one investor financed the purchase of a call spread by selling put options. The three-legged trade involved the sale of 4,200 puts at the May 120 strike for about 4.20 apiece. Next, the investor purchased the same number of call options at the May 155 strike for 7.25 each, spread against the sale of 4,200 calls at the higher May 165 strike for 4.50 per contract. The trader receives a credit of 1.45 each on the strategy. The full credit is retained by the investor as long as shares of ACL remain higher than $120.00 through expiration in May. Additional profits accumulate if the stock surges 7.5% to surpass the breakeven point at $155.00. Maximum additional profits available to the investor amount to 10.00 per contract, attainable if shares add 15% to $165.00 ahead of expiration in May.

VIX - CBOE Vix index – With equity prices sadly wilting by noon on Friday, investors were threatening to completely reverse Thursday’s giddy 2% advance. Traders were despondent after a 0.5% drop in consumer spending last month, which soured the tone following Thursday’s stimulus-stuffed GDP gain. The fear-gauge expanded by 8% to 26.70 as a result and one large options player appears to have placed a trade suggesting that volatility will be omnipresent – at least through year-end. The investor sold 10,000 December expiration puts at the 25 strike for a 1.75 premium, while buying half as many puts in the January expiration at the same strike. If the underlying Vix index settles at expiration above a value of the 25 strike price, the puts would expire worthless. This suggests this investor sees a rocky close to the year with volatility remaining elevated. The purchase of 5,000 puts for a 1.95 premium expiring 30 days later suggests the investor sees a calmer start to next year.

FEED - AgFeed Industries, Inc. – Shares of the Chinese feed and commercial hog producing company are trading 2.5% higher today to stand at $4.73. The firm received a ‘buy’ recommendation at EVA Dimensions yesterday. Option traders took to the May 2010 contract to initiate bullish positions on the stock. It appears a ratio risk reversal was…