NextEra Energy Stocks Have Had a Strong 12 Month
Increased use of renewables is likely to bring more tailwind for NO stocks
Potential buy-and-hold investors might view a short-term drop to $82 or below as a better entry point
Investors in the electric utility and alternative energy group NextEra Energy (NYSE:) have seen robust returns over the past 12 months. NO shares, which are up nearly 10% to date (YTD) and over 20% over the past 52 weeks, hit a record high (ATH) of $87.69 on Jan. 25. On September 15, the stock reached is $84.95.
The 52-week range for stocks was $66.78 – $87.69, while the company's market cap (cap) is $166.9 billion. The current price level also supports a 1.8% dividend yield. Nextera Energy, headquartered in Juno Beach, Florida, is one of the largest electric utilities in the United States. The group is also one of the leading producers of wind and solar energy.
The utility issued Q2 at the end of July. Adjusted earnings came in at 71 cents per share. A year ago it was 65 cents. The company reports revenues in three main segments: Florida Power & Light Company (FPL), which serves more than 5.6 million customer accounts, is the largest rate-regulated electric utility in the US;
Gulf Power, which is legally incorporated into FPL but will report separately until 2021; and
NextEra Energy Resources, the clean energy arm of the group
About the results, CEO Jim Robo quoted:
"NextEra Energy delivered strong results in the second quarter and remains well positioned to meet our growth expectations for 2021 and longer term… We increased adjusted EPS by more than 9% year-over-year ."
Management is focused on expanding portfolios for renewable energy and battery storage projects. As a result, it has expanded its customer base.
What to Expect from NO Shares
Of the 22 analysts surveyed via Investing.com, NextEra stock has an 'outperform' #39; rating. The stock has a 12-month price target of $90.56, which represents a return of nearly 7% from current levels. In other words, the street expects a modest price increase. The 12-month price range is currently between $78 and $109.30.
The lagging P/E, P/S and P/B ratios for NO stocks stand at 51.6x, 9.86x and 4.5x, respectively. In comparison, comparable ratios for Southern Company (NYSE:) are 22.35x, 3.2x and 2.48x. Similarly, the ratios for Entergy (NYSE:) stand at 18.6x, 2.1.x and 2.11x. In other words, NO stocks seem overvalued compared to other utilities. Investors have given a premium to NextEra's renewable energy business, especially in the past year when clean energy stocks were extremely popular. Investors viewing technical charts may be interested to know that some NO stock short term oscillators are overbought. While they can last for weeks, if not months, potential profit-taking can also be just around the corner. If broader markets or energy stocks go through the rest of the month or into October, we could potentially see Nextera's stock fall toward $82, or even $80. If the stock doesn't find support at that level, the next leg could be NO below $80, after which it can trade sideways as it establishes a new base.
Finally, as part of the short-term sentiment analysis, it would be important to look at the implied volatility (IV) levels for NO stock options. This metric typically shows us the market's view of possible movements in a security. However, this statistic does not predict the direction of movement. NextEra's current implied volatility is 19.2, which is above the 20-day moving average of 18.7. This means that implied volatility is on an upward trend. While the current IV level could change, the market doesn't appear to be expecting extreme jerkiness in the stock for now. possibly $80. Such a potential drop would provide a better entry point for new NO investors.
As a major game for utilities and clean energy, any potential drop in NextEra stock will likely be short-lived. By the end of the year, we could potentially see another surge in NO stocks that would eventually lead to a new ATH.
3 Potential trades
1. Buy NO shares at current levels 17, NO shares are at $85.05. Buy-and-hold investors should expect to maintain this long position for several months as the stock attempts another attempt to hit the all-time high of $87.69 and then move toward $90.56, analysts' consensus estimate. Such a move would lead to a return of about 7%. Meanwhile, investors concerned about large declines may also consider placing a stop-loss at about 3-5% below their entry point.
2. Buy an ETF with NO as the major shareholder
Many readers are familiar with the fact that we regularly hedge exchange-traded funds (ETFs) that may be suitable for buy-and-hold investors. Readers who don't want to invest capital in NO stocks, but still want significant exposure to the stock, may want to consider looking into a fund that the company holds as a top position. Examples of such ETFs include:
Virtus Reaves Utilities ETF (NYSE:): This fund is up 10.6% YTD and NO stock weight is 21.82% ;
Utilities Select Sector SPDR® Fund (NYSE:): Fund is up 9.1% YTD and NO stock weight is 16.44%;
iShares US Utilities ETF (NYSE:): The fund is up 8.5% YTD and the NO stock weight is 14.93%.
3. Bear Put Spread
Readers who believe there is more profit to be taken in NO stocks in the short term should consider starting a bear put spread strategy. Since these are options, this setup is not suitable for all investors.
It may also be appropriate for long-term NO investors to use this strategy in conjunction with their long stock option. The setup would provide some short-term protection against a price drop in the coming weeks. This trade requires a trader to have one long NextEra put with a higher strike price and one short NO put with a lower strike price. Both puts will have the same expiration date.
Such a bear put spread would be established for a net debit (or net expense). It will benefit if NextEra shares fall in price. For example, the trader can buy an out-of-the-money (OTM) put option, such as the NO Dec.17 82.5 strike put option. This option is currently offered for $2.68. So it would cost the trader $268 to own this put option, which expires in about three months. At the same time, the trader would sell another put option with a lower strike, such as the NO Dec.17 Put Option with 77.5 strikes. This option is currently offered for $1.35. Thus, the trader would receive $135 to sell this put option, which also expires in just over three months. The maximum risk of this trade would be equal to the cost of the put spread (plus commissions). In our example, the max loss would be ($268 – $135) X 100 = $133 (plus commissions). worthless. Both puts will expire worthless if the price of the NextEra stock is higher than the strike price of the long put (higher strike price), which is currently $82.50 upon expiration. The potential profit from this trade is limited to the difference between the strike prices (ie ($82.50 – $77.50) X 100) less the net cost of the spread (ie $133) plus commissions. In our example, the difference between the strike prices is $5.00. Therefore, the earning potential is $500 – $133 = $367. ]
In addition to its robust electric utility, NextEra Energy is likely to benefit from the increasing use of alternative energy sources. Therefore, investors with a two- to three-year horizon are likely to see significant returns in NO stocks. However, there could be even more short-term profit-taking in NextEra stock in the coming weeks.
