Make no mistake: the tumble stocks took in late 2008 has changed the way we invest. The uncertain market has changed our risk appetite. Right now, most eyes have turned to the “widow and orphan stocks” – the stocks deemed safe enough for even the most unsophisticated and conservative investors.

Among them are regulated utilities.

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.

I’m talking about wholesale power generation…

Many people don’t realize the fact that power companies — like PG&E, ConEd, and my local friends at Baltimore Gas & Electric — 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 a very different commodity – energy.

While most investors don’t think of energy as an investable commodity, it is. Utilities (and a number of other players) trade power just like retail investors trade stocks and options. And behind it all are the wholesale generation companies that power the grid.

NRG Energy (NYSE:NRG) 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 a total of more than 24,000 MW – enough to power between 4 and 8 million U.S. households according to Wolfram Alpha. 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.

NRG’s Operational Prowess

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. In June, NRG penned its latest deal with Pacific Gas & Electric to provide 92 MW of clean solar thermal energy from its Lancaster, California generation center.

With the Golden State’s serious peak energy needs in the summer months, the deal is more than green-energy PR for PG&E – it’s a cost effective means of helping to quench California’s power shortage.

But California isn’t the only strategically smart locale in NRG’s portfolio. NRG owns 1,400 MW of in-city generation capacity in New York City, as well as generation assets centered on metro areas in Texas, the greater Northeast, 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 (NYSE:EXC) in October of 2008, as well as a $7.9 billion pre-crash offer back in 2006 from Mirant (NYSE:MIR).

Both of those unrequited merger opportunities are telling about NRG’s management – while C-level stock options would have appreciated nicely under either offer, Crane and his team clearly believe that the company is on the path to be worth considerably more on its own in the intermediate term. I’m inclined to agree.

These Are Some Powerful Financials

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, and with the costs of building power plants 40% higher in the last three years according to analysts at Morningstar, chances are good that the market value of NRG’s generation assets exceeds what’s on the books… especially in hard-to-penetrate markets like NYC.

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.

Technically Timely

Shares of NRG look attractive from a technical standpoint as well…

The company hit a seemingly impenetrable resistance level just below $29.50 for the third time back in October just as the stock’s downgrade sent it sliding. But that freefall stopped just a few days ago when shares collided with support at the 200-day moving average.

That’s significant because it tells us that while investors overcompensated in selling down to the $23 mark, the stock is still obedient to the technicals… It also means that 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.

Dealing With the Market’s Malaise

Like most stocks, NRG is highly susceptible to the market’s recent mood swings. And with investor confidence waning at the prospect of another tumble into 2010, that means that going long on this otherwise amazing power generation play leaves some risk on the table. That’s something that we’ll deal with by monitoring this play very closely in the coming days and weeks.

With shares otherwise perfectly aligned fundamentally and technically, this Rhino play looks ready to dive into right now. We’re taking our position at NRG’s current price of $23.59 for the Rhino Stock Report’s model portfolio.

Tags: NRG, stocks