BOSTON (TheStreet) -- Investors have overlooked the inherent value of the following five companies, which receive five-star ratings from Morningstar. Still, they have many challenges. Morningstar predicts the stocks could more than double as business fundamentals improve. Below, they are ordered by potential return, from great to best.
5. GenOn Energy (GEN) is an independent power producer, with exposure to volatile commodity markets. It was formed through the all-stock merger of Mirant and RRI. The combined entity boasts a stronger balance sheet and competitive position. Both companies struggled after the peak of the last commodity cycle, with Mirant entering bankruptcy and RRI selling its retail business to NRG Energy. Independent power producers are "price-takers" and low natural gas prices have hurt GenOn's higher-cost coal plants. Energy prices remain low.
GenOn has invested more than peers in cleaning, or "greening," its coal plants and operates an efficient fleet. Coal remains one of the cheapest ways to generate electricity. Morningstar views the stock as a "call option on higher natural gas prices and energy demand." With expected cost savings of $150 million a year, as a result of the merger, Morningstar values GenOn's stock at $7. That price target suggests an impressive 90% return. But, it is 50 cents less than Morningstar's net asset value estimate of $7.50. This is a volatile stock, but worth consideration.
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