Analyst Rankings: Electric Utility Sector Feeling California's Pain Despite Strong Fundamentals

Independent power producers are among opportunities in the sector, two top-ranked analysts say.
Author:
Publish date:

This week, in our focus on the winning analysts in each industry category from our

Analyst Rankings -- Equity 2000

, we profile the top analysts tracking electric utilities. Next week we'll look at semiconductor equipment. (Our last focus was on

oil and gas exploration and production.)

Electric utilities had a banner year in 2000, outperforming the

S&P 500 index by more than 56 percentage points. As investors sought a safe haven from the carnage in the technology sector, many fled to defensive areas of the market like utilities.

But the group has suffered so far this year, partly from the fallout of the California power crisis and partly because of sector rotation out of defensive stocks as the

Federal Reserve's interest rate cuts make growth stocks once again attractive.

Our top two utilities analysts acknowledge that the problems in California have cooled investor confidence in the group -- the crisis has set off rolling blackouts throughout the state and left its two-largest utilities,

Pacific Gas & Electric

, a subsidiary of

PG&E

(PCG) - Get Report

, and

Southern California Edison

, a unit of

Edison International

(EIX) - Get Report

, near bankruptcy. However, both analysts feel that the crisis in California has had a disproportionately negative influence on investor sentiment. (

TheStreet.com's

Christopher Edmonds

has been following all the twists and turns of the

story in California.)

No. 1-ranked analyst Steve Fleishman of

Merrill Lynch

emphasizes that the elements that combined to create the situation are unique to California and its deregulation plan and are therefore unlikely to crop up in other parts of the country. Projecting strong earnings for most companies in the utilities sector, he sees plenty of upside potential, especially among power producers that have nuclear or coal generation and are selling into power markets being driven by high-priced natural gas. He names

Exelon

(EXC) - Get Report

as his top pick. Merrill Lynch has had no investment banking relationship with Exelon.

Goldman Sachs

analyst Jonathan Raleigh, our second-place winner, says that the market's punishment of power suppliers is overdone, believing that California's legislature has signaled its intention to pay the generators regardless of the utilities' ability to do so. He predicts strong performance from the independent power producers (IPPs), selecting

Calpine

(CPN)

as his top pick. Goldman Sachs has had an investment banking relationship with Calpine. (Third-place winner Daniel Ford of

ABN Amro

was unavailable for an interview.)

Electric Utilities

* Third-place winner Daniel Ford was not available for an interview.

Rate Their Stock Picks:

Which stock do you like best?

Fleishman: Exelon

Raleigh: Calpine

Image placeholder title