Riding The Rally
Fremont said he likes the “merchant generators,” including NRG and Constellation Energy Group . Other companies he believes will benefit from higher power prices are Public Services Enterprise Group, Exelon and Entergy.
“We think you stay away, at this point, from the more regulated names because they don’t have the upside we see currently in higher generation prices,” Fremont said.
But Paul Justice, an analyst at Morningstar, cautioned investors who are looking for stocks to hold for the long haul.
“I think the run-up has lasted a little too long,” Justice said. “We were bullish on the sector last summer, but now we think the prices have gotten a little bit out of control. We agree that power prices are going to be high for the next three to five years. When you go into these long-term capital investments, we think power prices will come down after that period. The sector we’d like to look at is more regulated names –- traditional investments that get you anywhere between 8% and 10% returns on equity over the 30- to-40-year life span of these investments.”
Michael Krensavage, pharmaceutical analyst at Raymond James, told CNBC’s “Morning Call” that strong revenue and earnings growth will reward investors in the pharmaceutical sector.
He said first-quarter revenue grew about 8% and earnings climbed about 10% as the sector benefited from the Medicare Prescription Drug program that President Bush signed into law last year.
“Growth is looking good for these companies,” Krensavage said Tuesday. “In addition, we’re seeing some improvement in the companies’ pipelines.”
He likes Johnson & Johnson because it has underperformed. Johnson & Johnson also benefits from comparisons with Merck, which has recently had a strong run-up in price.
“Johnson & Johnson is a company that traditionally represents very good value,” Krensavage said. “Right now, it’s trading at a slight discount to the S&P 500. This is for a well-managed company that has a diverse revenue base. It has consumer products and medical devices –- not just pharmaceuticals.”
Jeffrey Kraws, senior pharmaceutical analyst at Crystal Research Associates, said investors might consider holding a basket of pharmaceutical stocks that include large-caps and generics.
He said patents expire on drugs with total sales of between $15 billion and $25 billion in the next few years, and this should benefit companies like Barr Pharmaceuticals. Among large caps, Kraws recommends Novartis.
Susan Wachter, professor of real estate and finance at Wharton Business School, told CNBC’s “Power Lunch” that the housing market has yet to hit bottom.
“Sales are still declining, but they should turn around by the end of the year,” Wachter said.
She said the housing sector now faces a classic chicken-and-egg conundrum.
“We’re going to have to have more sales to have the visibility, but the market’s going to have to find the right pricing,” Wachter said. “(Pricing is) very local. The markets haven’t found the right pricing in many parts of the country.”
Thomas Smith, homebuilding analyst for Standard & Poor’s, said he expects housing prices to be flat or even slightly down over the next 12-to-18 months.
He expects housing starts to "find a bottom" in 2007, down about 25% from the peak levels in 2005. He said starts may tick up in 2008, but only because average prices have declined. If so, revenue for the home building industry will be weak.
Nevertheless, he said Meritage Homes, Centex and Standard Pacific are strong regional plays.