Take a rain check on International Power

Would you be willing to bet on a long, hot summer in the US? Fancy a punt on the Australian weather? That is what your broker will be asking of you if he or she suggests buying into International Power, the generation business demerged from National Power.

Despite good earnings in the first quarter of the year, the shares continue to drift lower. IP will only be able to generate a recovery when there is clarity on energy prices in its core markets this year. The next important period for this is the summer, and if the weather is poor, the air conditioning stays off, demand for power is low, and prices fall.

If the weather is good, IP reaps the benefit of higher prices and could lock in its gains by singing long-term deals to supply electricity at these high prices. That would give scope for analysts to boost forecasts for 2003 profits.

Forecasts for this year's earnings seem to be in the bag. The company is predicting 14p per share, and made 4.6p in the first three months. Profit before tax in that first quarter was £76m, up from £58m in the same period last year.

Much of that was down to compensation from its contractors for delays to the building of new power stations in the US. Bears of the stock are wrong to treat those payments as an exceptional item and to say the underlying US business in fact operates at a loss; it wouldn't be doing so if it hadn't encountered the delays for which it is being compensated.

But the US business is certainly not as exciting as investors hoped at the time of the demerger. IP is unusual in its sector for refusing to pay a dividend, preferring to plough earnings back into the business, building or buying new plants across the globe to create a high-growth company. This has proved an untimely strategy now that battered investors would rather have the cash. And the jury is still out on whether the company can find the right acquisitions to make it really work.

IP is currently playing down its US division, where the energy market, post-Californian crisis and Enron, is still in chaos, and prices are still weak. Now it prefers to highlight its geographical spread, which has taken the group into the Middle East and Asia.

The flipside of working in these developing markets, of course, is that shareholders are being asked to shoulder more than the usual political risk. A U-turn by the Pakistani government forced International Power to accept significantly lower than agreed prices for power in that country, and it is only now, after a new deal was signed in April, that the group's Pakistani assets will pay a dividend.

That should boost earnings to more than 16p this year, putting the shares on a multiple just shy of 12. That's not worth chasing yet, and is still a big premium to its US peers, but investors should watch the temperature closely.

Threat of interest rate rises makes volatile Paragon only a hold

Paragon has come a long way since its bad old days as National Home Loans, which epitomised the madness of the housing frenzy in the late 1980s and sank under a flood of bad debts.

Paragon is what was salvaged from that business. It has tightened its lending criteria and focused on the buy-to-let market. It also bought a consumer credit business to diversify risk across more of the lending spectrum. As a result, the group has been growing nicely.

Yesterday it reported a 12 per cent rise in interim profits to £20.5m. Its mortgage book increased by a third to £1.2bn. Even more encouragingly, the company said loans that have been agreed in principle but not finally signed were at an all-time high. That promises a strong second half of the year.

The prospects for long-term growth in the buy-to-let sector are good. Forget the current housing boom, the sector will be driven by the ways in which society is changing. These include the burgeoning student population and the increase in divorce. According to the Centre of Economics Research, the rental market will increase by more than 40 per cent in the next 10 years.

Nevertheless, there are risks attached to buy-to-let. Nigel Terrington, the chief executive, himself warned that some landlords are rushing into hotspots such as central London when prices may have already peaked.

Paragon tries to counter this by concentrating on professional landlords, who are more canny about where to buy properties. It did not see an increase in bad debts last year. But the company will find it impossible to escape the expected slowdown in housing growth. As its other side of the business is consumer finance, it is also at risk if people ease their currently carefree spending.

Paragon has a convincing business model and sound management. It is forecast to make pre-tax profit of £45m for the year, putting its shares, up 1p to 268.5p, on 9 times earnings. That looks cheap given the long-term potential, but the shares are volatile and with interest rate rises on the horizon there is a growing risk of trouble ahead. They are only a hold.

Time to take profits at Countryside Properties

Investors in Countryside Properties, the Essex-based housebuilder, would be wise to follow their fellow shareholders in banking some of their recent gains. The shares tumbled 5 per cent when the company produced slightly disappointing results yesterday, as problems in other parts of the business – commercial property development and building on behalf of other landowners – held back the interim profits.

These were £12.5m, barely up on the £12.2m last year, despite a 25 per cent rise in profits at the core housebuilding unit.

There were falling margins in the design and build division, which constructs projects for housing associations, and a small loss in the commercial property division, which had been scaled back in anticipation that a weak economy would reduce office block values. The company professed confidence, though, that it will make up ground in the second half. It boosted its interim dividend to a handsome 2.38p, and the house broker, ING Financial Markets, held its forecasts of full-year profits at £34m.

There is still no sign of a housing market meltdown, with Countryside reporting forward sales and reservations are both up strongly. The group is exposed to the South-east but there are reasons to think it would withstand any downturn well. It has an enviable reputation for getting developments through the planning process, because of its expertise in mixing social housing, commercial use and private apartments in its developments. And it has a four-year land bank, giving plenty of room for manoeuvre.

Its stock market valuation has always been held back by its modest size and by the dominance of its founding family, the Cherrys. The shares, down 10.5p to 211.5p from a ten-year high, now trade on a multiple of 7, which is probably as good as it gets. Take profits.