3SOF

David Randolph · January 06, 2006, 07:08:58 AM

1. Profile

Reliant Energy, Inc (RRI). provides electricity and energy services to retail and wholesale customers in the United States. The company offers energy products and services to approximately 1.9 million retail electricity customers in Texas, including residential and business customers, and commercial, industrial, and governmental/institutional customers. It also provides capacity and ancillary services in the wholesale energy markets. The company offers asset management services, including transportation and storage, and supply management; emisions and renewable credit trading; and long-term energy-management solutions, including contract administration and accounting services, and financing. Reliant also serves commercial and industrial clients in the Pennsylvania, New Jersey, and Maryland interconnection. In addition, the company trades and markets power, natural gas, and other energy-related commodities, as well as provide related risk management services. As of December 31, 2004, it owned, had an interest in, or leased 50 operating electric power generation facilities with an aggregate net generating capacity of 18,737 MW in six regions of the United States. The company was incorporated in 2000 and was formerly known as Reliant Resources, Inc. It changed its name to Reliant Energy, Inc. in April 2004. Reliant Energy is based in Houston, Texas.

2. Technical Analysis

2.1. Long Term Chart

RRI had a bear period in 2001 and 2002, a bullish period between 2003 and mid 2005 and now a new bearish period starting in late 2005.

2.2. Medium Term Chart

On the medium term chart we can see that the long term ascending trendline was broken down with violence on the 1st of November. That was due to this news: Reliant Energy Reports Third Quarter Results and Provides 2005 Outlook Reflecting Asset Sales

2.3. Short Term Chart

Over the short term, I see that the rebound after the stock collapse didn't make it to close above the midpoint of that all important (25 million shares traded on that day) red marubozu. This tells me the downtrend is pretty much in place and it can resume quickly to the downside.

3. Fundamental Analysis

3.1. Cash

This was what scared me the most, this company is almost out of cash, just $50M, for a $3.07B market cap. I'm aware that they are selling assets to get cash to finance operations, namely their NY plant for $975M, but probably that will just give some more time to this dying company.

3.2. Working Capital

The Current Ratio (assets/liabilities) is dangerously low. If the company continues losing money it will face a liquidity crisis in the not so distant future (if it were not for the selling of assets the company would already be in it, since it burned $577M of cash to finance operations in the first nine months of 2005 and has just $50M in the bank).

3.3. Revenues

Revenues have been decreasing since the company's inception (note that for 2005 we only have an estimate). Although they are very high numbers (the P/S Ratio is 0.32 and the industry's P/S Ratio is 1.22), the declining revenue trend is worrisome.

3.4. EPS

The company has been facing losses for the last 4 years.

3.5. Gross Margin

Gross margin is shrinking since 2003 and the net margin is negative.

3.6. Competition

RRI is cheap in comparison, but I believe that's for a good reason.

4. General Overview

RRI is a company with high risk and deteriorating fundamentals. Usually when a company announces that is selling assets, it goes up, but this time it went down, so the market sees the long term risk of RRI. Technical analysis shows a descending trend for the stock price and a clear stop level in case I'm wrong on my fundamental assessment.

I don't know if the company is going bankrupt or not, but as I see it, it can easily go down to $1 as it was on October 2002, due to that risk. The risk on a short trade is that the stock closes back above $10.75, the midpoint of the red candle that started the current bearish trend.

5. Trading Plan

Sell RRI short around today's open looking for a 50% profit in 2006. Stop loss level on a close above $10.75 (about 7% risk).

This trade is for the 3 Stocks on Fire Portfolio, 6.66% of capital as usual.

David Randolph · January 09, 2006, 06:22:17 PM

It is hard to be bearish on a particular stock in a bull market, even if the stock has so desinteresting fundamentals and chart as RRI has. I still didn't make a penny on my short operations, I wonder if RRI will be the one?

Well, I have to respect my initial trading plan and continue holding RRI SHORT for as long as the stock is set to close below $10.75.

David Randolph · January 10, 2006, 05:51:10 PM

Nothing new on RRI, I'll continue with the trading plan of holding the stock SHORT, unless it is set to close above $10.75.

David Randolph · January 11, 2006, 04:42:57 PM

I know why Livermore felt it was the same for him, to go long or short. That is because he always invested on margin.

But, for a all cash investor like myself, shorting doesn't make all that much sense

Although I don't feel shorting is adequate (I had to try and study to know), I know it is my obligation to continue with my trading plan of holding RRI short for as long as the stock doesn't close above $10.75.

yukii · January 13, 2006, 01:30:19 AM

Another recommendation is Reliant Energy Inc. (RRI:

10.55, +0.16, +1.5%) , a wholesale energy provider that Weintraub called a "cyclical asset play."

Reliant trades at discount to the value of its assets, Weintraub said, the result of legal and financial troubles and difficulties selling electricity into an unregulated marketplace.

But Weintraub said he's encouraged by corporate insiders buying Reliant shares, the company's coal reserves and the prospects for its retail electricity business in Texas.

Weintraub said the company's assets are worth at least $15 a share. "It's a good risk-reward," he said, "and its an improving situation."

Shares of Reliant Energy rose 16 cents on Thursday to $10.55.

David Randolph · January 13, 2006, 06:49:44 AM

Thanks for the info yukii

QuoteWeintraub said the company's assets are worth at least $15 a share. "It's a good risk-reward," he said, "and its an improving situation."

On the last earnings report total assets are $13.71B, but liabilities are $9.68B.

QuoteBut Weintraub said he's encouraged by corporate insiders buying Reliant shares, the company's coal reserves and the prospects for its retail electricity business in Texas.

He's right, insiders bought some shares in November and December. I didn't notice this before. I might be wrong on this trade and Weintraub is right. But I have to let the market talk, there's not all that much risk on my trading plan, so I will close my position if and only the stock is set to close above $10.75 (or with a nice profit, of course).

David Randolph · January 16, 2006, 06:43:00 AM

There isn't anything else to do on RRI but to pursuit the trading plan of holding the stock short, unless it is set to close above $10.75.

shawFund · January 25, 2006, 02:02:08 AM

What I see RRI:

It is about to break-out in ascending trendline chart pattern.

David Randolph · January 25, 2006, 07:24:05 AM

Quote from: shawFund on January 25, 2006, 02:02:08 AM
What I see RRI:

It is about to break-out in ascending trendline chart pattern.

Thanks for your view shawFund

Since I came this far I will keep the plan until the end, and RRI still failed to close above $10.75.

David Randolph · January 27, 2006, 05:22:38 AM

$10.75 is getting more and more significant on RRI. Look how the stock is starting to come back down after flirting for so long with that strong resistance level.

I'll keep the plan of holding RRI short, unless it is set to close above $10.75.

David Randolph · January 30, 2006, 04:06:57 AM

My initial trading plan on RRI was:

Quote5. Trading Plan

Sell RRI short around today's open looking for a 50% profit in 2006. Stop loss level on a close above $10.75 (about 7% risk).

I'll continue with this trading plan, now that the market is starting to agree with my fundamental reasoning. This company is running out of cash and the only thing it can do is to sell assets or stock in the open market. Either way, it is a shrinking operation and the stock price is starting to reflect that.

David Randolph · February 01, 2006, 06:06:29 AM

$10.12 has been providing short term support for RRI. If we break $10 on the downside, as I suspect will happen, the downtrend should accelerate. Patience is key here. Time is on my side.

David Randolph · February 03, 2006, 06:06:25 AM

Well, nothing new on RRI, not technical or fundamental that I know of. I'll continue with my plan of holding the stock short for as long as it is set to close below $10.75 (or close it with a nice profit, of course).

David Randolph · February 05, 2006, 07:14:57 AM

Anytime there can be a red marubozu on RRI, taking it down to $9. As the oil price goes up, RRI's costs will rise even more, and its troubled balance sheet will become a serious issue.

Sales have been rising on RRI, but costs rose even faster. Liabilities are $9.7B now.

I'll continue holding RRI short, unless the market proves me wrong with a close above $10.75.

David Randolph · February 07, 2006, 06:25:17 AM

RRI released news yesterday and it rose 3.15% on light volume: Reliant Energy to Discuss Outlook for 2006 through 2008 Using Forward Commodity Prices

I wonder what they'll say, but «using forward commodity prices» seems like more fancy financing to me. Either way, I'll continue with my plan of holding RRI short, unless the stock is set to close above $10.75.

News:

RRI