We recently published a list of 10 Most Undervalued Utility Stocks to Invest in Now. In this article, we are going to take a look at where PG&E Corporation (NYSE:PCG) stands against other most undervalued utility stocks to invest in now.

EY believes that utilities are required to balance growing energy demands, decarbonization goals and customer satisfaction while, at the same time, navigating regulatory and financial challenges. Therefore, creative funding and strategic partnerships remain critical to financing ambitious energy projects amid elevated capital costs. Modernization of infrastructure can lead to a sustainable and resilient energy future, supporting providers and consumers.

Favourable Outlook for US Utilities Sector

As per Morningstar, one of the critical shifts in the US utilities sector is the strong growth of renewable energy sources. Over the past decade, declining costs for wind and solar projects and state-mandated renewable energy targets resulted in strong investments in clean energy. Utilities are required to innovate and invest in smart-grid technologies and battery storage in a bid to accommodate the growing influx of renewable energy. Such advances are expected to ensure grid reliability and efficiency with an increase in renewable energy’s share of the generation mix.

One of the critical components of the moats in the utilities sector is the regulatory framework in which they operate, says Morningstar. The requirement for regulatory approval and oversight to set customer rates tends to limit competition, but it also restricts utilities’ earnings. The regulatory environment ensures their ability to operate with predictable cash flows. The next aspect is the requirement for large capital investment. Building and maintaining the infrastructure required for electricity, gas, and water distribution requires significant capital, with regulators limiting the returns utilities can generate on such investments. Therefore, rate regulation and the requirement of reliable and consistent energy supply result in stable demand and predictable revenues, attracting investors who want low-risk and steady returns.

READ ALSO: 7 Best Stocks to Buy For Long-Term and 8 Cheap Jim Cramer Stocks to Invest In.

Electricity Demand to Revive

Historically, the US electricity demand has reflected the economic growth, averaging ~2% annually, says Morningstar. That being said, since 2000, this relationship continued to weaken because of improvements in energy efficiency and lower industrial electricity use. As a result, electricity demand has remained flat since 2007. However, the firm believes that revival seems to be on the cards. Several factors are expected to fuel renewed growth in electricity demand.

These include the proliferation of EVs, diminishing returns on energy-efficiency advancements, and surge of data centers because of advancements in AI. The utility companies are required to prepare themselves for higher demand by making investments in grid capacity and reliability. They can also make alliances with EV manufacturers and charging network providers so that they can capitalize on the dynamic EV market, added Morningstar.

Our Methodology

To list the 10 Most Undervalued Utility Stocks to Invest in Now, we used a screener to shortlist companies catering to the broader utilities sector. Next, we filtered out the stocks that trade at a forward P/E of less than ~20x. We also mentioned hedge fund sentiments around each stock, as of Q4 2024. Finally, the stocks were arranged in ascending order of their hedge fund sentiments.

Why are we interested in 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 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).

PG&E Corporation (NYSE:PCG)

Forward P/E as on March 4: ~10.8x

Number of Hedge Fund Holders: 74

PG&E Corporation (NYSE:PCG) is engaged in the sale and delivery of electricity and natural gas to customers.  The company has been working to serve ~5.5 gigawatts (GW) of new data center energy demand over the next decade, and 1.4 GW remains in final design and is expected to come online between 2026 and 2030. Just to provide a brief perspective, 1 GW is enough power to serve the demand of ~750,000 homes at once. PG&E Corporation (NYSE:PCG) further added that new data center load projected to come online over the upcoming 5 years consists of 740 megawatts that the company evaluated through its original cluster study in 2024.

Notably, new energy demand from data centers enables the company to utilize more of its existing power infrastructure. PG&E Corporation (NYSE:PCG) has also signed a $15 billion loan guarantee agreement with the U.S. Department of Energy’s Loan Programs Office in a bid to fund the grid modernization projects and potentially save customers up to $1 billion on a NPV basis through lower-cost financing. PG&E Corporation (NYSE:PCG) reaffirmed 2025 GAAP earnings guidance in the range of $1.30 – $1.36 per share.

Third Point Management, a New York-based investment advisor, released its Q4 2024 investor letter. Here is what the fund said:

“We are devastated by the recent events in Southern California. Several of our family members and team members call Los Angeles home, and our hearts are with all impacted by the fires.

While PG&E Corporation (NYSE:PCG) does not operate in this region, there is press speculation that one of the fires, Eaton, may have been related to transmission equipment owned by SoCal Edison (SCE), another investor-owned utility (parent company Edison International.) Edison has stated publicly that they do not believe their equipment was involved. The investigation is ongoing, and we believe it is premature to make conclusions about the origin of the fire…

If the Eaton fire ignition was related to SCE equipment, the California legal standard of “inverse condemnation” exposes SCE to resultant property damage liabilities. After PG&E’s bankruptcy in 2019, California passed a bill called AB1054 which protects the state’s investor-owned utilities (Edison, PG&E and Sempra) from these liabilities as long as they adhere to a rigorous safety standard. This includes a comprehensive wildfire mitigation plan approved annually by the government and a commitment to spend billions to harden the grid; for example, PG&E is spending a whopping $18 billion on wildfire mitigation from 2023 -2025. In exchange, AB1054 includes several protections, such as a legal prudency standard that entitles the utility to cost recovery via multiple avenues in the event of a catastrophic fire and a $21 billion insurance fund to cover incurred liabilities. SCE has an active safety certificate and thus should benefit from the protections under AB 1054, just as PG&E would in case of a future fire. Regulator-approved cost recovery is a routine proceeding for utilities in areas prone to severe climate events (hurricanes, tornadoes, earthquakes, etc.) in acknowledgement of the fact that it is not feasible to remove all risk from overhead grid infrastructure. PCG has been the preeminent advocate in California for undergrounding, which we believe is the only way to permanently eliminate wildfire risk from grid assets…” (Click here to read the full text)

Overall, PCG ranks 3rd on our list of most undervalued utility stocks to invest in now. While we acknowledge the potential of PCG as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for a deeply undervalued AI stock that is more promising than PCG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap

Disclosure: None. This article is originally published at Insider Monkey.