Should You Buy Vistra While It's Below $200?

In a state known for its love of big things, Irving, Texas-based Vistra (NYSE: VST) fits right in.

Not only is the company one of the largest non-regulated power generators in North America, it's also a major player in the nuclear space (operating six reactors, licensed for 60 years) and a huge power producer supplying both the wholesale and retail electricity markets.

Another big thing about Vistra right now are its market returns, which currently rank it third best of 31 stocks in the Utilities Select Sector SPDR Fund (NYSEMKT: XLU) with a 40% year-to-date gain through Nov. 3. That's more than double the performance of the sector and the broader S&P 500.

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And since the market lows in early April, Vistra's outperformance has been even wider, as its stock has essentially doubled in seven months, while gaining 750% over the past three years, and more than 1,000% in total returns since 2020.

VST Total Return Level data by YCharts

Right place, right time

Part of Vistra's outsized growth has to do with market sentiment -- being in the right sector at the right time -- which is supported by the Utility Sector's 20% YTD gain, which ranks it second, behind only the Technology Select Sector ETF (NYSEMKT: XLK).

Another big part of its advance has to do with the fact that as a so-called merchant generator, Vistra does not earn the typical regulated rates of return that come with the public utility commission oversight that its monopoly style peers face, but rather, can sell power at market prices, to both wholesale buyers as well as its own base of 5 million retail customers.

Of course, free markets move up and down but at a time when demand for power is rising -- due in part to the surge in new artificial intelligence (AI) projects -- and new power supply is limited and slow to develop, the case for high prices is strong.

Risk vs. reward

Vistra investors do need to be aware of the unpredictability of regulatory risk and fluctuations in commodity prices related to fuel for its plants and wholesale electric prices. They also need to acknowledge interest rate risk, which is consistent with any capital-intensive industry that carries significant debt.

In addition, there's also the reality that Vistra is not cheap, with a forward price-to-earnings (P/E) ratio of 29 times and forward price-to-sales (P/S) ratio of 3.4 times expected results over the coming 12 months. Both of the figures land Vistra in the mid-80th percentile range, meaning those valuation metrics have only been higher about 15% of the time.

All in, Vistra's recent reality has not gone unnoticed and continues to enjoy the support of utility industry analysts, with 85% (17 of 20) who cover Vistra currently rating it a buy, with an average 12-month price of $225, implying about 20% upside from current levels.

Buy the dip?

Compared to the utility sector's 2.5% average yield, not to mention the group's top payout of 5% to 6%, Vistra's 0.5% dividend is tiny. Even so, Koyfin data shows the company has increased it for five consecutive years and, with a dividend payout ratio of just 20%, can easily afford to pay it -- and likely continue to increase it.

That said, Vistra investors have been more than compensated with triple-digit stock price gains over the past three to five years, and are not likely involved with it as an income play. Over the short-term, however, the past three months has seen Vistra's stock slide about 11% at a time when the utility sector rose 3.5% and the S&P 500 added about 8.5%. Investors looking and waiting for a good entry point should take note that shares of Vistra have fallen 15% since hitting an all-time high of $219 on Sept. 25.

Vistra will update investors on Thursday Nov. 6, when it reports its third-quarter earnings results.

Matthew Nesto has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.