3. NRG Energy (NRG - Get Report), like GenOn, is an undervalued independent power producer. Its success is similarly dependent upon power demand, which has remained at depressed levels since the recession. Morningstar describes its fleet of coal and nuclear power plants as "ultra low-cost." So, should power demand rebound, which is expected as the economy grows, NRG will see a jump in demand and earnings. It retrofitted plants to burn Powder River Basin coal, a more efficient input, elevating coal-fired margins. Still, Morningstar views this as a risky pick.
Like GenOn, NRG has high "fair-value uncertainty." It trades at a discount to other industry investments because it is subject to a variety of risks. If natural gas prices fail to rise in line with expectations, the economy falters, electricity demand stagnates or Washington imposes new emissions standards, then NRG's shares will drop in value. Further, Morningstar expects margin deterioration through 2012 and then a pickup as growth accelerates. A recent deal to purchase assets from Dynegy fell through when the company rejected a contingent buyout from Blackstone Group.