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"Powering" the portfolio !

Blackstone bought Dynegy with nearly 62% premium. What did Blackstone see in DYN which markets could not see for last few years since all power producers have been in rut since Enron saga ? Is it time to look at some of these independent power producers and utilities ?

The investment logic goes something like this:

  • With economy eventually growing, there would be higher need for power thus increasing demand for power / energy
  • Creating new power plants cost quite a bit of capital which is not easily available
  • With Blackstone deal, there would be more companies / PE firms looking at these companies 
  • These companies have steady cash-flow
  • They are trading dirt-cheap compared to their book values
Here are couple of companies worth taking a look with potential of 20-30% return over 12-18 months:
  • RRI ($3.5) or MIR ($9.80) - both these companies merging to produce a power producer with over 24000 MW. Both are trading at about 35% of book value
  • NRG ($20) - With over 21000 MW capacity, it has scale similar to merged company of RRI/MIR. Trading at 65% of BV offers good value and foundation for low-risk portfolio
Last week was brutal for markets but overall trend has been one week up, one week down. Markets are clearly confused because it is not able to figure out what's in store for 2H2010. The trend would continue all the way till US elections are over in first week of Nov. Till then DOW would continue to trade between 9800 to 10800 !

For all Indian readers, Happy Independence Day !

/Shyam

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