British Energy beat the market's blues yesterday, climbing 32.5p to 571p on rising power prices and hopes the government would give the go-ahead to new nuclear power stations.
An announcement is expected this week and analysts at Cazenove believe it is likely plants will be built on the company's sites. Caz raised its target price from 660p to 730p yesterday, based on higher long-term electricity prices and a 114p-a-share valuation for new plants.
"British Energy is the clearest value opportunity in the European utilities sector," said the broker, which pointed out there should be a strong news flow from the company over the next few weeks. Apart from the expected new plants, it is due to update the market this month on when its Hartlepool and Heysham 1 advanced gas reactors (AGRs) will reopen. In February it should announce its third-quarter results and the amount of its additional dividend.
"The decoupling of the company's share price performance from the wholesale electricity price has been due to uncertainty around the near term output from Hartlepool and Heysham," Caz said. "In our view, the market is factoring in such a pessimistic scenario for the AGRs that any positive news flow could see the shares materially re-rate."
Scottish & Southern Energy was also in demand, up 33p to £16.68 after an upbeat note from Credit Suisse with a £17.75 target, following the company's purchase on Friday of Dublin-based windpower company Airtricity.
With investors in an uneasy mood yesterday, other defensive stocks were also in demand. Pharmaceuticals group GlaxoSmithKline added 45p to £13.21, and AstraZeneca rose 60p to £21.70. Despite a fall in the crude oil price yesterday, it is still close to historic highs, and this lifted BP by 9.5p to 637p and Royal Dutch Shell by 38p to £21.87.
The FTSE 100 index lost early gains and closed 12.8 points lower at 6335.7. Investors were unsettled by reports of conflict between Iranian and US sailors over the weekend, as well as worries about the state of the US economy after Friday's disappointing jobless figures. Even a recovery on Wall Street after an early dip failed to inspire London.
Housebuilders, retailers and fund managers were among the major losers.
Ahead of forthcoming trading statements, Taylor Wimpey fell 14.2p to 179.8p and Persimmon lost 40p to 685p. Concerns about the weak UK housing market are unlikely to be eased this week, traders believe, with the Bank of England now expected to keep interest rates on hold on Thursday.
Marks & Spencer dropped 19.5p to 498.5p on unsubstantiated talk of a disappointing Christmas, while J Sainsbury slipped 14.5p to 391p for a similar reason. DSG was the biggest faller among the mid-caps, down another 6.25p to 70.75p after last week's profit warning.
Schroders slid 76p to £11.26 as Citigroup downgraded from hold to sell, while the bank also helped send shares in New Star Asset Management 11p lower to 168.25p. Citi said: "We expect the short-term news flow on New Star to be challenging, given its weak investment performance and net fund outflows from its UK Property unit trust. The group will publish a trading update on January 31, and there might be a small share placing from employees afterwards. We are reducing our recommendation ahead of the trading statement to hold from buy, with a new 12-month target price of 200p."
Directories group Yell fell 14.25p to 343p after Lehman Brothers slashed its price target from 398p to 223p as part of a hefty note on the media sector. Lehman is negative on broadcasters, consumer publishers and directories, but positive on advertising agencies.
Anglo American lost 143p to £29.01 after weekend reports that it had postponed plans to sell its £3bn Tarmac business due to the turmoil in financial markets. Paul Singer, an analyst at Barclays Wealth, said: "The group is concerned that it will not get the best price for the business if it proceeds with the sale now ... We think the market may well conclude that, for the time being, Anglo will be somewhat constrained in its M&A activity in the near term despite still-good cash flow generation."
Rival Rio Tinto fell 183p to £50.32 on speculation it may bid for Canadian uranium specialist Xemplar, currently valued at about £400m and attractive due to its Warmbad prospect in Namibia.
Paving stones maker Marshalls added 17.5p to 254.25p as it issued an upbeat trading statement, while European Nickel rose 1p to 50.5p on talk it was expanding its joint venture with Rusina Mining.
On Aim, ethanol producer Renova Energy slumped 21p to 12.5p after it said it did not have enough funds to finish building a plant in Idaho and therefore had breached its banking covenants.