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USEC's Gain Tops Regional Stock Index In 1st Quarter

The biggest gainer in all of the District, Maryland and Virginia was a little clothing maker in Baltimore, I.C. Isaacs & Co., shares of which jumped 88.5 percent as it recovered from fashion foibles.

But in and around the Capital Beltway, the hot stock was USEC, the company created in 1998 after the government privatized the manufacturing of nuclear power plant fuel.

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USEC took over a government-owned plant in Kentucky that makes nuclear power plant fuel. The technology is top secret because it can also be used to create atomic bombs.

The company went public at $14.25 in 1998, but within a year the stock fell below its offering price and never recovered until last quarter. The stock climbed past $18 a share, then fell back to $16.28 amid a contentious debate over whether USEC stock has overheated.

The shares are rated "hold" by the lone analyst who studies the details of the company's business, David Schanzer of Janney Montgomery Scott in Philadelphia. He values the stock at $14 a share and calls it "not for the faint of heart."

USEC stock began to retreat after online columnist Herb Greenberg of MarketWatch.com put the shares on his "red flag list" a few days ago, challenging many of the rationales cited for its big gain.

The company's shares recently were cut to "sell" by Ivan Feinseth of Matrix USA, a New York institutional research firm that evaluates stocks based on a proprietary model of company finances. Feinseth had rated USEC a "buy" back when the stock was selling for $7.

Still, investors have been buying USEC because the company is regarded as a "pure play" on the future of nuclear power, which many energy gurus believe will inevitably make a comeback as the price of oil soars. (Maybe so, counter the doubters, but not soon.)

To understand the company, you have to understand a little about nuclear power: There are two forms of uranium, one much more radioactive than the other. Raw uranium contains only a small portion of the hotter form. To run a power plant or build a bomb, you need more of the potent stuff. So the uranium has to be "enriched" to increase the concentration of the more radioactive form.

Today, the uranium is enriched using 50-year-old equipment that gobbles energy, saddling USEC with a $300 million annual electric bill, said Steven Wingfield, USEC's director of investor relations.

Testing of new technology designed to cut energy costs by 95 percent began in January, Wingfield said. The big issue is not whether the technology works but whether it really will save that much on energy, which is 60 percent of the cost of enriching uranium. If the economics prove out, USEC plans to raise $1.5 billion to build a new plant in Ohio.

Wingfield said about 20 percent of the nuclear fuel USEC sells is made from the company's own stockpiles of uranium. The remainder is made from uranium belonging to utilities, which buy it and bring it to USEC for enrichment. USEC also transports and stores nuclear fuel.

Believers in the nuclear renaissance theme note that no other company's prospects are so closely linked to the future of nuclear power. You can invest in utility companies that have atomic power plants, but nuclear energy is only a fraction of their operations. So too with the companies that build nuclear reactors -- industrial giants such as General Electric Co. and Westinghouse Electric Co. that have many other businesses. Uranium is also a sideline for mining companies, which extract it from ores mined for gold and copper.

The nuclear renaissance theme resonates with both investors and energy experts. But the trouble with themes, cautioned Feinseth, is that "people take themes to an extreme. That is what happened here."

Even if all goes well, it will be five years before USEC's new plant is fully operational, Greenberg said, and nobody yet knows if it will be as energy-efficient as hoped. Foreign competitors with more modern plants can enrich uranium at a lower cost than USEC and have been cutting into its market share.

A shift from burning coal, oil and natural gas to generate electricity would take a decade and would require a 180-degree change in Americans' attitude toward nuclear power.

Still, Greenberg reported that a long-term investor in USEC, who has made an more than 80 percent profit on the stock, says he hasn't sold a share because he remains convinced it is a good long-term investment. On the other hand, short sellers -- who hope to profit when stocks fall -- have been moving into USEC recently, placing big bets that the recent run-up in the stock is only a temporary spike.

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