Higher Energy Prices Brighten Outlook for Utility Stocks

Paul Fremont, managing director at Jefferies & Company, told CNBC’s “Morning Call” that he has a strong outlook for electric utility stocks.

“We believe that, for the time being, you’re looking at prospects for much higher power prices,” Fremont said Tuesday. “So, at least for the next year or two with generation prices poised to increase $50 to $80 per megawatt hour -– which would nearly double the cost of power to end users –- we think the prospects for electric utility stocks have never been brighter.”

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.”