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Drax Group Plc (DRX.L) through its subsidiaries, engages in the generation and sale of electricity in the United Kingdom. Based in Selby, it owns and operates Drax Power Station, a coal-fired power station in North Yorkshire. This power station has an output capacity of 4,000 megawatts. The company also sells by-products of the electricity generation process, such as ash and gypsum; and levy exemption certificates, renewables obligation certificates, and sulphur dioxide emissions allowances. It sells electricity generated through the electricity wholesale market.

In the run up to preliminary results in February, on December 6^th 2016, Drax published a trading update, and announced a conditional agreement to acquire Opus Energy Group Ltd and four Open Cycle Gas Turbine development projects. CEO Dorothy Thompson said the company continued to expect full year EBITDA to be around the bottom of the range of current market forecasts, but added that the Opus acquisition marked “an important step in delivering our strategy, contributing to stronger, more predictable, long-term, financial performance, through greater diversification of the businesses, delivering more opportunities right across the markets in which we operate.”

The investment opportunity at DRX had been flagged up by the VectorVest system as the stock started to drift lower around 280p during November 2016. The stock appeared on a number of metric indicators, including Relative Value (RV) and Relative Timing (RT) metric tables. RV is an indicator of long-term price appreciation potential, and DRX has an RV of 1.32, which is very good on a scale of 0.00 to 2.00. RT is a fast, smart, accurate indicator of a stock’s price trend that shows DRX RT rating at 1.63 – excellent on a scale of 0.00 to 2.00. Several other metrics highlighted the opportunity at DRX at the same time, with Value (the measure of a stock’s current worth) highlighting DRX at 452.49p per share, and therefore undervalued at its current Price of 366.80p per share.

A weekly chart of DRX is shown below with the share price graphed in candlestick format. Since December 2014 the share has been charting a large inverted head and shoulders reversal. This reversal was confirmed by a breakout of the “neckline” of the pattern in the last trading week. The target from the head and shoulders reversal should take the share towards the 500 level.

Many chartists would argue that the head of the reversal pattern is also a rounding bottom or cup formation. If so, then the handle of the cup and handle formation has given a strong buy signal in the last trading week as the 52 week high was exceeded.

Of note is the poor Relative Safety metric on VectorVest. At less than 1 this shows that there have been surprises and missed targets in the past. The opportunity looks good but solid and unemotional risk management should be in place and strictly adhered to.

In pursuing further diversification across its portfolio of businesses, DRX is clearly striking a chord with investors and major shareholders. Even though the stock now trades at year highs, the key VectorVest indicators show that all the key factors are in place for continued growth. Buy.

Dr David Paul

December 28th 2016

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