The market is concerned about inflation. However, there is a difference between now and the 1970s. In the '70s, commodities had a run, but so did wages, stoking inflation in a huge way. Now the commodities are having a terrific run, but with the globalization of the world's labor market, we still have low labor-market prices. This, in my opinion, will allow commodities to be bullish, without igniting the Fed's inflation alarm. Though I feel inflation has and will creep into the market to a degree, I do not believe we are seeing a repeat of past cycles. A commodity bull market presents several buying opportunities. You can buy stocks or commodities that are participating, or you can buy stocks in companies that will benefit from rising commodity prices. One dormant technology that finally shows signs of life in the U.S. is nuclear technology. China has stated that it will build 40 new nuclear power plants, Japan 13 and even Turkey three. France already gets 78% of its electricity from nuclear energy. The U.S. is about to get on board the nuclear train. In an attempt to encourage nuclear plants, Congress included a risk-insurance provision in its 2005 Energy Policy Act. The provision will cover $500 million in delays for the first two nuclear reactors built, and $250 million for the next four. The federal energy bill also provided billions of dollars in subsidies, tax breaks and incentives. My pick in nuclear technology is Exelon ( EXC - Get Report), America's largest and most profitable nuclear power-plant operator. Exelon is also going to become the world's second-largest after this summer's acquisition is complete with New Jersey-based PSE&G ( PEG - Get Report). Once combined with PSE&G, Exelon will have an estimated $27 billion in revenue, with an estimated $3.2 billion in net income in 2006. Analysts estimate further 30% growth in 2007.
What is interesting to me is not the current numbers and estimates, but the potential of this company because of the renewed interest in nuclear technology. In 2004, nuclear power represented just 16% of world energy production, despite the fact that nuclear power can produce a kilowatt hour at just 1.82 cents, lower than coal and a third of natural gas, according to the Nuclear Energy Institute's 2004 numbers. Nuclear power is again a growing technology; this time, though, it is safer and much more efficient. The key is to bet on the right horse. I would place my money on Exelon, a well-run company whose production costs are more than 50% below what they were just seven years ago. With coal prices and natural gas prices set to climb, the cost benefit of nuclear will continue to grow, and public sentiment, already at almost 60% in favor, will continue to grow. The U.S. hasn't built a new nuclear reactor since 1973. That will soon change. Exelon is well positioned to benefit from what is going on in the world vis a vis nuclear power.
recommended Fluor in mid-March, and it has seen an almost 15% rise in share price. I still like this stock, but with the hurricane work and Iraq reconstruction tapering off; I would watch for any weakness.
Speaking of weaknesses, knowing when to sell a stock has been one of my biggest. I have become emotionally attached to too many stocks and lost money. However, the fear of every investor is that he will miss out on a huge part of a stock's run if he sells while the stock still has legs. Not that I am just sucking up to TheStreet.com's co-founder and largest shareholder, but Jim Cramer's book
Real Money: Sane Investing In An Insane World , has really helped crystallize my thinking about stocks. It's caused me to put a movable floor on stocks that I own. For example, I thought Steel Dynamics ( STLD - Get Report) had gotten ahead of itself at $50. Today it is in the mid-$60s. I let it run because I continuously put a floor, also known as a stop-loss order, under the stock that I will execute if the share price hits it, no matter what. I would have hated to sell this stock at $50, given the bull market in commodities has pushed it to a high of $69. So, I put a constant floor under it of around 12%. How I arrived at that number is just what I felt comfortable with. At $69, I could have taken profit. However, I looked at the stock and realized I had bought it at just under $23 in May of 2004, and I realized I would be happy selling it at $60. My floor is now $60. If it breaks out again, I will move my floor up to another price I know I will be happy with, and I will execute it no matter what. We are in a terrific commodities bull market. If you think stocks you own are out of their historic range and overvalued, but you are scared to sell feeling that they may have legs left, I recommend you use a movable floor. This way you ensure yourself of keeping your profit and still allow the stock to run. Remember, being poor is bad, staying that way is stupid.