All too often, by the time a trend is big enough and proven enough for the media outlets to tell investors about it, the best part of the move is over. In some cases, a burst of media attention can even be the kiss of death for a rally, as an influx of new amateur buyers allows all those previous institutional buyers to unload their shares without driving the price lower.

The solution? Look for budding trends that nobody is talking about yet. Right now, that's the independent power producers ... names like Constellation Energy Group (NYSE:CEG), The AES Corp. (NYSE:AES), and yes, the now-defunct Enron.

TUTORIAL: All About Inflation

By the Numbers

The attraction to these stocks isn't a great track record of recent results - quite the opposite, in fact. This group somehow skipped the bulk of the 2010 market rally, with the S&P 1500 Independent Power Producer Index losing about 19% that calendar year, while the S&P 500 gained about 11%. Some of that ground has been made up in the meantime, but the independent power producer index is still well below 2007's peak levels (56% below it, to be precise), while the S&P 500 is just 15% away from getting back to its 2007 peak.

It's the most recent strength, coupled with all that room to recover, that's hinting the group's time has finally come.

When the broad market finally started to fade in late February, the power producers were just starting to shine. The former is a hair underwater since then, while the latter is higher by about 9% and still rolling.

While the relative performance numbers alone paint a compelling picture, it's still not the whole story... stocks can not survive on momentum alone.

Not All Built the Same

As is the case with many industry trends, some of the independent power stocks are doing more work than others, and some of the underlying companies are doing better than others. So, we can take the group-wide bullish clue at face value. We just need to carve out the leaders.

One of them is the previously-mentioned AES. The stock saw a great 2009 thanks to a record-breaking EPS of $1.15 that year. When earnings slumped to 94 cents per share in 2010 - the lowest since 2005 - a soft patch for the stock was understandable. Earnings are on the mend again, though, with $1.07 per share expected for 2011. So far, the stock's been reflecting that growth revival.

A handful of other higher-profile names have started to perk up as well, in terms of earnings as well as their stock's performance. One of the most attractive picks is an off-the-radar small cap, though - Calgary-based TransAlta Corp. (NYSE:TAC). The forward-looking P/E ratio of 17.7 isn't stellar, but after topping estimates in its past two quarters (especially against a backdrop of two earnings misses before that), investors can make a decent case that TransAlta has turned an important corner. (To learn more, see P/E Ratio: What Is It?)

Canada's National Election Helped Outlook

The long-term outlook for TransAlta, in fact, may have improved considerably a month ago when Canada held its national election.

Though the New Democratic Party (or NDP) didn't take a majority control of the country's legislative seats, it bumped its presence up from 34 to 102. It's a big deal to investors, because the NDP's desired energy policy leans heavily toward a carbon cap-and-trade and carbon-tax system. With a major focus on eco-friendly energy sources like wind and geothermal, TransAlta may be able to circumvent much of that potential burden if Canada's New Democratic Party continues its trend and eventually takes a majority of seats in a subsequent election.

On the flipside are noteworthy liabilities like Dynegy (NYSE:DYN), which has not only managed to continue losing money since 2009, but has found a way to widen those losses... with no end in sight.

Bottom Line

As the numbers suggest, the group as a whole is looking healthier, but it's still an individual stock-picking situation. (For related reading, see Five Minute Investing: Stock Picking.) One thing investors may want to consider about what separates the winners from the losers is the reason Dynegy is struggling right now - debt.

Though lower power prices were cited by the company as a problem and cause of last quarter's declining revenue, it doesn't appear to be an issue for other independent power companies. Perhaps the bigger challenge to profit growth for the group's struggling stocks is debt.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  9. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  10. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center