In this article, we will take a look at 7 Cheap Utility Stocks to Buy According to Hedge Funds.
The global utilities industry encompasses three primary sectors: electricity, natural gas, and water. It plays a crucial role in the safe, secure, and sustainable generation, transmission, and distribution of these essential resources.
A major provider of energy in most countries, electricity stands as a notably interesting component of the overall utility industry. The EIA’s Short-Term Energy Outlook report projects a 3% increase in U.S. electricity generation this year compared to 2023, driven mainly by a surge in solar power, with natural gas also playing a key role. However, utilities are struggling to gain customer support for their sustainability goals, which are crucial for justifying rate cases, funding infrastructure projects, and encouraging changes in consumer behavior. This, along with aging infrastructure, has led to steadily rising operating expenses for transmission and distribution, particularly for major investor-owned utilities over the past decade. With summer cooling costs expected to increase by 8% this year, both residential and business customers are becoming more concerned about energy prices. Meanwhile, although 80% of U.S. utility customers are served by providers with a 100% carbon reduction target, the J.D. Power 2024 Sustainability Index shows that only 21% of them are aware of their utility’s efforts to reduce carbon emissions.
However, there have also been significant developments in the opposite direction, particularly with the utility sector partnering with the tech industry, largely fueled by advancements in artificial intelligence (AI). Major players like Microsoft Corporation are making significant strides in this space, primarily due to nuclear power’s capability to support the energy-intensive demands of AI applications while aligning with lower carbon footprint goals. In that regard, Goldman Sachs projects that by 2030, AI data centers will more than double their electricity consumption, reaching 8% of the U.S. total. Coupled with the rising adoption of electric vehicles, the demand for power is set to grow even further. Speaking on the relationship between the utilities sector and AI, Tom Essaye from Sevens Report Research noted:
“AI growth story only adds to what is a bullish set up for utilities that already includes 1) Falling bond yields (makes high dividend equities like utilities more attractive to income investors) and 2) A slowing economy (which boosts demand for less economically sensitive stocks).”
In early August, utility stocks offered investors a rare glimmer of hope amid a broader U.S. market selloff, as market turbulence drove a shift away from the tech stocks that had fueled gains for most of the year. Historically, utilities have been the top-performing sector during the six months surrounding the first rate cut in an economic cycle, according to a Goldman Sachs analysis.
Supporting this trend, the Federal Reserve’s recent decision to cut interest rates by 0.5%, or 50 basis points, is expected to benefit developers and sponsors of renewable energy projects. “The start of a rate-cutting cycle will jumpstart projects,” said Mona Dajani, partner and global co-chair of energy, infrastructure, and hydrogen at Baker Botts. Dajani pointed out that the initial rate cut was deeper than expected, highlighting that a rate-cutting cycle typically doesn’t begin with a 50-basis-point reduction:
“I think that’s a good indicator, like putting your money where your mouth is. The market was expecting 25, but it felt good. It’s huge. And I think that as a whole, clean energy is one of the big winners.”
Dajani added that the market anticipates the Fed cutting rates by a total of 100 basis points by year-end, which “would facilitate the expansion of the domestic supply chain for clean energy, making it easier to finance and build new factories for solar, batteries, EVs, and wind.”
Our Methodology
To compile our list of undervalued utility stocks favored by hedge funds, we used stock screeners to identify companies with forward price-to-earnings (P/E) ratios below 20 as of September 26, which are also well-regarded by analysts. The selection is based on the popularity of these stocks among the 912 hedge funds tracked by Insider Monkey and is ranked in ascending order based on the number of hedge funds holding each stock.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
7. Dominion Energy Inc (NYSE:D)
Forward P/E as of September 27: 16.85
Earnings Growth this year: 39.20%
Number of Hedge Fund Holders: 27
Dominion Energy, Inc. (NYSE:D) is a major American energy provider, delivering electricity and natural gas across several U.S. states. Despite recent market fluctuations, Dominion has shown resilience, with its stock price hitting a 52-week high of $58.13.
BMO Capital Markets recently raised its price target for Dominion Energy, Inc. (NYSE:D) shares from $53 to $57, maintaining a Market Perform rating. This adjustment came after the company reported second-quarter earnings per share of $0.65, surpassing both BMO’s and the consensus estimate of $0.57. The strong performance was driven by growth in regulated investments, positive contributions from the Millstone power plant, and other factors. Notably, the Coastal Virginia offshore wind project is now one-third complete, and infrastructure enhancements are underway to support a projected 4.5% to 5.5% increase in demand from Virginia’s data centers in 2024.
Additionally, Dominion Energy, Inc. (NYSE:D) and its subsidiary, Virginia Electric and Power Co., recently secured offshore wind leases in a recent U.S. government auction. The company also issued $1.2 billion in senior notes, intended for general corporate purposes.
At the end of the second quarter of 2024, 27 hedge funds tracked by Insider Monkey held stakes in Dominion Energy. The largest stake, valued at $283.2 million, was held by Ric Dillon’s Diamond Hill Capital.
6. Xcel Energy Inc. (NASDAQ:XEL)
Forward P/E as of September 27: 16.60
Earnings Growth this year: 5.00%
Number of Hedge Fund Holders: 29
Xcel Energy Inc. (NASDAQ:XEL) provides electricity and natural gas services across eight U.S. states through its subsidiaries. The company’s energy portfolio includes a blend of renewable sources like wind and solar, as well as conventional options such as coal and natural gas.
Mizuho Securities has reiterated its Outperform rating for XCEL, setting a price target of $70 over the stock on September 27. The firm highlighted Xcel’s capital expenditure plans and regulatory matters, including the Minnesota rate case. During the upcoming third-quarter earnings call, Xcel Energy’s management is expected to update their capital expenditure forecast and provide an updated outlook on load growth, projected at 3%.
Recently, the utility company reported earnings per share of $0.54 and announced a substantial $1.7 billion investment in energy infrastructure. Xcel Energy Inc. (NASDAQ:XEL) also reaffirmed its 2024 earnings guidance, underscoring its commitment to building resilient infrastructure and expanding clean energy initiatives.
As of the end of June 2024, 29 out of 912 hedge funds tracked by Insider Monkey held stakes in Xcel Energy Inc. (NASDAQ:XEL). The largest shareholder was Israel Englander’s Millennium Management, with a $229.17 million position.
Here’s what Aristotle Capital Management, LLC, said about Xcel Energy Inc. (NASDAQ:XEL) in its Q1 2024 investor letter:
“Xcel Energy Inc. (NASDAQ:XEL), one of the largest renewable energy owners among regulated utilities, was a primary detractor during the period. Shares fell as the company’s facilities appear to have been involved in an ignition of the largest wildfire in Texas state history. As a result, insurance companies have begun filing lawsuits claiming Xcel should be held liable for damages related to the more than one million acres burned. Though the magnitude and likelihood of settlements are difficult to quantify, we believe potential payouts would be meaningfully less than the over $5 billion in market value the company lost in the days following the news. We will continue to closely monitor the situation and its impact on the company, as a full investigation is still underway. Over the long term, our conviction remains that Xcel is well positioned to benefit from increased demand for clean energy, as its service territories have what we believe to be some of the best wind and solar resources in the country.”
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