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Northumbrian Water (NWG) 365p

The water company is in good form, and the shares should keep performing well despite uncertainty in the market. Northumbrian has recently reassured investors saying that trading was in line with expectations. The benefit of lower energy in the prices in the past will be wiped out this year, however the company has been more sophisticated in securing its energy supply. Investors in the utility sector will shift their holdings towards Northumbrian which is still good value, with a 3.3% forecast yield and a 2008 PE ratio of 14.6 times. The company’s dividend appears to be one of the safest in the sector, and gearing levels have remained unchanged. Risks come from the ongoing discussions with the regulator about customers’ bills. This is a long process during which companies may see their first requests turned down, however later on the regulator usually leaves enough room for profits and rewards to shareholders. We suggest going long, placing a relatively wide stop loss at 343p to offset high market volatility.

ACTION: BUY Northmbrian Water • Target 401p • Stop Loss 343p

TIME TARGET: 5 WEEKS