Activist Investors Have Created A Buying Opportunity In This Energy Stock

Under normal circumstances, I don’t like to see activist investors getting involved in companies whose stock I own or am considering buying. Almost by definition, the hedge funds and investment firms that constitute the kind of investor who believes that a minority stake in a company entitles them to set the agenda have short-term goals, and focusing on the next quarter rather than the next decade is, I believe, a plague that has negatively impacted corporations worldwide. There are, however, exceptions to my distrust of stocks with activist involvement, and NRG Energy (NRG) is one of them.

News broke on Thursday morning that Elliot Investment Management, who in May disclosed a roughly $1 billion “economic interest” in NRG, is seeking to oust the company’s CEO, Mauricio Gutierrez, and other top executives after having sent a letter to the company a month ago requesting that they make some strategic changes. Clearly, Elliot feels that that request for change fell on deaf ears and is now taking a more aggressive approach.

The market’s view of the desirability of some change is clear. By lunchtime on Thursday, NRG was the day’s best performing stock in the S&P 500, up more than 4% from Wednesday’s close.  The thing is, though, it looks as if the chances of any major personnel change being forced at the executive level are slim. It isn’t known how much of that $1 billion interest, if any, is in stock, but even if it turns out to be quite a substantial percentage it still isn’t enough to win a battle against a board who have declared their support for Gutierrez and his colleagues.

The fact that the story broke in the Wall Street Journal, however, rather than by way of an official announcement, suggests that Elliot Management are all too aware of their limitations. They presumably leaked the story to put pressure on Gutierrez and the board in the hope of forcing some changes in return for dropping their public objections to existing executives. If Gutierrez survives, though, those changes may still be bad news for Elizabeth Killinger, the Executive VP of NRG Home, the division that Elliot has publicly called out in the past. The integration of Vivint, which NRG bought back in December has not exactly been a roaring success, and Killinger may end up paying the price for that.

If so, the sale of the unit is on the cards, and that may well be why the market is so bullish on the possibility of the kind of turmoil that usually scares traders and investors. NRG is one of those companies that has grown almost too far, too fast, and a return to a more focused company, concentrating on execution rather than acquisition, would be a good thing. Even if that doesn’t happen, though, a case can be made for buying the stock at these levels. The forward P/E of around 7 is about right for a company mired in inefficiencies and losses, but if there is any kind of a turnaround as a result of Elliot’s pressure, it will look ridiculously cheap in a few months’ time.

That turnaround isn’t certain, of course, but in this case, the loud-mouthed, bully boy tactics of an activist investor may be what is needed to make it happen. So, while the involvement of that kind of company often prompts me to sell stock before a messy, distracting fight for the soul of a company gets underway, in this case, I see it as a reason to buy NRG, looking for at least a bounce back above $40.