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As utility stocks heat up – here are the three solid options to keep an eye on

Dino
Kurbegovic
3 months ago
5 mins read

An increase in bond yields is disturbing the stock market, however, utility stocks have benefited, and could possibly keep delivering. 

The 10-year Treasury yield has surged to almost 3% as a side product of the Federal Reserve’s (Fed) battle against inflation. Reduction of the Fed’s balance sheet doesn’t bode well for riskier sectors but actually improves the defensive sector’s returns. 

The exchange-traded fund (ETF), Utilities Select Sector SPDR (NYSEArca: XLU) is up 6.3% compared to the S&P 500 which is down 7.8% on the year. Conventional wisdom tells us that higher yields hurt utility stocks since they usually accompany a stronger economy.     

This time the yields are a result of the Fed’s battle against inflation which is pushing investors into utilities. Thus, making the following three utility stocks worth putting on every investors’ watchlists. 

Dominion Energy (NYSE: D)

Dominion is aiming for decarbonization and renewables which coupled with their most recent earnings report of an expanded asset base of 9% is setting up the company for a bright future. Roughly 7% of earnings per share (EPS) growth is predicted which is translated into $4.38 earnings per share by 2023. 

Investment in zero-carbon emission electricity generation should reach $5.4 billion out of the total $7.4 billion in annual investment the company is predicting. 

The share price has followed suit, with the beginning of the more risky environment in 2022 the stock traded upwards slowly trading close to all-time highs. Daily Simple Moving Averages have been left in the dust and without additional unforeseen shocks to the system, the stock should not be testing lower resistance lines.   

D 20-50-200 SMA lines chart. Source. Finviz.com data. See more stocks here.

Analysts give the stock a moderate buy, predicting that the average next 12-months price will be $87.78 which is close to the current trading price of $87.40. Bullish analysts believe there is more upside to be had setting the highest price at $93. 

Source: TipRanks

Clearway Energy (NYSE: CWEN)

The company is diversified mostly across renewable energy business but also has a modest natural gas generation business. Clearway recently sold its thermal operations for roughly $1.9 billion, these funds will be reinvested into renewable sources as per the company. 

Margins may be smaller due to investments but the company is setting itself up for future success. The generous dividend of 3.7% is there to sweeten the deal for potential investors and seems to be safe despite being much higher than most dividends in the space.

To start off 2022 the stock did not perform all that well, however, it has somewhat recovered since then. On certain trading days, peculiar volume spikes could have been observed which did not move the stock all that much. 

Squeezed between the 200 and 50-day SMAs the stock could test the lower resistance line. Lowered margins do have an impact on the stock however in the current environment the CWEN could run up fairly quickly depending on inflation and moves by the Fed. 

CWEN 20-50-200 SMA lines chart. Source. Finviz.com data. See more stocks here.

Analysts covering the stock are split and have given Clearway Energy a moderate buy. For the next 12 months, the average price they see is $39 which is 13.90% higher than the current trading price of $34.24.

Source: TipRanks

PG&E (NYSE: PCG)

In 2019 a settlement was reached and PG&E had to pay out $13.5 billion for a wildfire its utilities caused. This incident brought a rerating of the shares however the share price has recovered as investors are coming around to this utility stock. 

The company generates roughly $20 billion in revenue and operates at a comfortable profit despite its previous challenges. With President Biden’s administration passing the $1 trillion infrastructure bill, PG&E could potentially be a recipient of some of these funds. After all the bill intends among other things to prevent outages and enhance power lines’ resiliency.  

The stock has recently seen a double top as shares climbed almost 50% from the lows in August 2021. This could be a bearish signal for the stock so investors looking for an entry point should wait and see whether the stock breaks support or continues to rise along an uptrend. 

PCG 20-50-200 SMA lines chart. Source. Finviz.com data. See more stocks here.

Analysts give the stock a moderate buy rating predicting on average that the next 12-months price will reach $16. This would mean that the PCG would have another 30.08% to go from the current trading price of $12.30.

Source: TipRanks

Expensive as it looks

Utility stocks usually trade expensively during heightened uncertainty and as long as issues keep piling up on global economies the potential for these companies to do well increases. Inflation, rising energy prices, food prices going up, and political turmoil is expected to continue to rock the stock market.  

Having a solid investment thesis and keeping calm in the eye of the storm could yield benefits for a more stoic investor. 

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk. 

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Dino Kurbegovic
Author

Dino is an investor and technology enthusiast with years of experience in managing complex projects. At Finbold he covers stories on stocks, investing, micro and macroeconomic trends. Also, he’s also building a micro solar power plants in his hometown.

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