RBC Says Stick With Infrastructure Stocks Until The Fed Raises Rates

Shelby Tucker of RBC Capital Markets is awaiting a major catalyst over the next three to six months that can move the markets higher. The analyst suggested that the "most impactful" catalyst will come from the Federal Reserve and whether it will raise rates.

In the interim, Tucker is looking for a safe sector to invest in. The analyst noted that power markets have yet to recover and defensive utilities have gone from trading at a near 30 percent premium to the S&P 500 forward year P/E to its current in-line multiple (despite a "steady" earnings per share growth rate over the past few years). At the same time, YieldCos have yet to "settle down." With that said, infrastructure investment was singled out as an attractive sector heading into the year end.

FirstEnergy Top Value Pick

Tucker named FirstEnergy Corp. FE as a top pick; shares were rated with an Outperform rating and $39 price target.

Back in 2014, Ohio utilities filed for a new Electric Security Plan through 2019. The utilities proposed a 3,244 MW purchased power agreement (PPA) with FirstEnergy, and if the PPA receives approval, it could add around $150 million to $200 million of additional pre-tax income for the company's Competitive Energy Services Segment, according to the analyst.

Tucker added that the benefit to the company could translate to $0.15 to $0.30 per share in earnings, and this outcome isn't included in valuation models and estimates. In addition, the company's management has stated that the PPA would eliminate the need for any equity for ratings purposes.

NextEra Energy: Three Upcoming Catalysts

Tucker rated shares of NextEra Energy Inc NEE with an Outperform rating and $128 price target.

The analyst highlighted three upcoming potential near-term catalysts that could boost shares higher: 1) the company has already filed a formal letter with the necessary courts to state its continued interest in acquiring Oncor; 2) the company's Florida power and light segment is expected to file a general rate case in early 2016, and the analyst is not expecting its ROE to be reduced; 3) while the company faces "significant" opposition to its acquisition of Hawaii Electric, the acquisition is "less likely than not to receive the necessary approvals."

PNM Resources: Settlement Approval

Tucker rated shares of PNM Resources Inc PNM with an Outperform rating and $32 price target.

Tucker noted that the company is entering the final stages of receiving a final approval for the settled Best Available Retrofit Technology (BART) proposal. The proposal includes the shutdown of San Juan units 2 and 3, bringing into rate base 132 MW of San Juan unit 4 and Palo Verde nuclear plant unit 3, and installing selective non-catalytic retrofit (SNCR) technology to San Juan units 1 and 4.

According to Tucker, PNM is on track to receive approval of its BART proposal by the end of the year and will "solidify" the company's "expected large rate base growth" in 2018.