If you buy one stock today, Vistra Corp (NYSE: VST) is a solid choice. The stock is cheap, it trades for just two times trailing 12-month revenue. Fiscal year 2025 starts on January 1, and earnings per share (eps) is expected to jump from $5.83 this year to $6.93. That gives Vistra a forward price-to-earnings ratio of 11.
That’s cheap for a company growing earnings at a 28% clip.
From a technical analysis perspective, Vistra appears to have just completed what’s called a “head and shoulders” pattern:
I’ve indicated the pattern with crudely drawn red arcs.
The “head” is in the middle, and the shoulders are on either side. There are two rules for a head and shoulders pattern. 1 – the right shoulder must be lower than the left shoulder. The reason for that rule is that the head and shoulders pattern is an exhaustion pattern…
Traders ran the stock up to the first shoulder. There was a pause, and then the stock pushed to a new high (the head). The stock then pulled back, which should be an invitation to new buyers. And it was – buyers entered and the stock moved higher – BUT, the price was unable to even reach the first shoulder, let alone the head.
That’s the exhaustion. Traders that bought on the expectation that the price would move back to the highs (the head) are instead quickly saddled with a loss. They bail, and the stock moves lower.
Head and shoulders rule #2 tells us how much a stock will sell off after the head and shoulders pattern triggers. The rule states that the stock will fall below the “neckline” just as much as it rallied above it.
The “neckline” is the line that connects the two shoulders. For Vistra, you can see the neckline pretty clearly right around $90.
The high for Vistra is $107, $17 above the neckline at $90. So the head and shoulders rule says that Vistra should fall $17 from the neckline – down to the low $70s. It has done that, and in fact, fell all the way to $66.50 during the brutal sell-off a couple weeks ago.
Vistra shares have recovered and should be considered “in play” for new money.
Why Invest in Vistra
Now I understand that you might hear the words “technical analysis” and “head and shoulders pattern” and think “what a bunch of hooey…”
The whole point of technical analysis is simply to have a framework for evaluating buying and selling behavior. Like it or not, investors are emotional – and the patterns of greed buying and fear selling repeat over time. We are human, that ain’t changing…
I know analysts who say that technical analysis is all you need…that if you can pinpoint when investors are acting on greed or fear, it’s easy to make money buying or selling stocks. You can ignore fundamentals.
Personally, I think that’s a bunch of hooey. I definitely use technical analysis to help me identify entry and exit points. But there’s no way I’d buy a stock simply based on how the chart looks. I have to have a fundamental framework into which the stock fits. I need a reason to own a particular stock…
I wrote about Vistra for Outsider Club members on June 7 when the stock was at $85. Because Vistra is one of the companies that will benefit the most from the surge in electricity demands from AI data centers.
Vistra is the largest independent producer of nuclear power in the U.S. Here’s the deal:
If there’s a knock on utility stocks, it is that their pricing is regulated and any price hikes have to be approved by regulatory boards. Utilities revenue and profits will benefit from demand. But they may not be able to raise prices to capitalize as much on demand…
Vistra is listed as a utility company with nuclear, coal, natural gas and solar power generation capacity. And it does have a customer base in Texas. But Vistra also operates as an independent power producer. That gives it the opportunity to sell power into the grid at market rates.
And if you know anything about the Texas power market, you know it is vulnerable to surge pricing at various times during the year.
Utilities and power generation stocks typically don’t do well when interest rates are high. It’s a capital-intensive business and high borrowing costs eat into the bottom line. The stocks have pulled back over the last couple of weeks as the expectations for rate cuts keep getting pushed out further into the future.
Rates will come down at some point. And the power demands from data centers are only going higher.
One last thing: if you peruse the news feed for Vistra, you’ll see that it missed earnings expectations when it reported a couple weeks ago. Even though it posted a solid year-over-year gain for revenue, profit margins fell from 14% to 8%. Seems bad, and analysts did lower current quarter earnings estimates. But they raised Q4 earnings from $1.33 to $2.04 a share, which is huge. Full-year 2024 and 2025 estimates got a bump too.
Current prices around $79 look like a pretty good spot.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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