Make sure your portfolio flies right!

Airlines – the stocks every investor loved to hate a year ago – have been gaining altitude quickly, with Continental Airlines and AMR (parent of American Airlines) rising roughly 150% and 200%, respectively, from their 52-week lows.

Sounds good, but beware of UAL Corporation, parent of United Airlines, and JetBlue Airways, both of whose leaking stocks could leak even more.

That’s the advice I get from one Standard & Poor’s analyst, Jim Corridore, who takes a dim view of the two carriers even though he recently issued a bullish airlines report, predicting a spirited rebound this year following an estimated $5.5 billion industry loss in 2005.

His theory: Thanks to strong passenger demand, moderation in oil prices, heavy cost-cutting, rising airfares, and a peppier economic environment, the worst is over for the airline industry.

UAL, which he notes as an exception, came out of bankruptcy a few weeks ago after shaving $7 billion a year in costs. Alas, its stock, which at the time began trading again at around $40 a share, has gone into a tailspin; it’s now at $35.75.

Mr. Corridore has serious concerns about UAL, questioning the impact of high fuel prices and whether its costs are still too high. He ridicules a management comment that it could make a profit if oil was at $50 a barrel. With oil now hovering around $60 a barrel, why, he asks, doesn’t the company deal with reality and specify at what price it could make a profit? In effect, UAL is saying 2006 will be a losing year. Mr. Corridore’s view of the stock: “It’s priced too aggressively.”

In the case of JetBlue, which he views as a great operation, he notes it has already forecast a loss for the first quarter and the full year, which has hurt the stock. Further, the carrier is not well-hedged on the price of oil. Likewise, he points to a sky-high price-to-earnings multiple of more than 70, based on the Street’s 2007 estimate of $0.15 a share, which JetBlue has already said is too high. His view is that there is “not much reason to buy the stock.” It’s presently $11.24, down sharply from last year’s high of $20.66.

So which stocks would he buy? His favorites, which he thinks have a lot more mileage even though they’ve rebounded sharply, are AMR and Continental Airlines. He also likes Alaska Air, Sky West, and Southwest Airlines.

***

PRICING POWER: It’s great to have an edge in life. Ditto in the market. An especially important edge this year is pricing power – namely, the ability to hike prices that can stick.

Why? Because corporate America, stung by rising material costs across a broad range of industries, must pass along the price increases or face the consequences, warns monthly newsletter Dow Theory Forecasts of Hammond, Ind.

Those consequences could be pretty dire. In brief, companies that lack the muscle to boost prices could be in hot water because they’ll see their profit margins and bottom lines shrink and their stock prices fall, the newsletter’s research chief, Richard Moroney, said.

For some time, global competition has muffled pricing power, a trend likely to be sustained. As such, companies with the most pricing power will likely be those with little global competition.

The newsletter recently analyzed the companies it tracks to determine those with pricing power. It came up with 13 names, each of which has boosted gross and net margins in each of the past four quarters. Two favorites – both transportation-related and both of whose stocks could gain 20% or more over the next 12 months – follow.

One is FedEx ($102.93), the overnight delivery service company whose per-share profits have beaten consensus estimates in three of the last four quarters. Meanwhile, it recently initiated a series of price hikes, which, coupled with strong demand, Mr. Moroney predicts, should fuel profit growth this year of at least 20% to $5.76 a share.

The newsletter’s other pricing power favorite is Norfolk Southern ($49.15), a railroad that has fended off higher fuel prices via surcharges and contract hedges. Further, with rail players limited and capacity stretched, the company, Mr. Moroney observes, should have plenty of pricing power. Meanwhile, the firm seems to be on a roll, with increased demand and price increases generating steady margin expansion. It posted 2005 earnings of $3.11 a share, nearly 39% higher than $2.31 a year earlier.

Rounding out the newsletter’s 13 pricing power plays are AFLAC,Canadian National Railway, ConocoPhillips, Coventry Health, Harris Corporation, Home Depot, MetLife, Microsoft,Valero Energy,Walgreen, and Wal-Mart Stores.