Utilities Outperform in 2024: 3 Stocks to Keep on Your Radar
In a surprising turn of events, the utilities sector has emerged as one of the best-performing sectors of 2024. Year-to-date (YTD), the Utilities Select Sector SPDR ETF (NYSE: XLU) is up nearly 30%, outpacing both the QQQ ETF and the S&P 500 ETF (NYSE: SPY), which have gained closer to 20%. This rally challenges the preconceived notions surrounding utility stocks and signifies the potential for steady growth in a tumultuous market landscape.
What’s Driving the Surge in Utilities?
While the utility sector isn’t typically heralded for its high-growth potential, a combination of unique catalysts has fueled its outstanding performance in 2024. A major component of this growth trajectory is the increasing power demands associated with artificial intelligence (AI). With data centers expanding at an unprecedented pace, the energy requirements have surged, presenting a tremendous opportunity for utilities. Additionally, recent interest rate cuts have ignited investor enthusiasm in this sector, as utilities generally thrive in lower-rate environments. As if that weren’t enough, a renewed commitment to nuclear energy, long seen as a pillar of a cleaner, more reliable future, has further propelled the utilities sector forward. With this advantageous backdrop, the following three utility stocks are worth keeping an eye on.
XLU ETF: The Best Play for Broad Sector Exposure
For investors looking for a sweeping view of the utilities sector, XLU is your best bet. This ETF tracks the Utilities Select Sector of the S&P 500 Index and covers industries such as electric utilities, energy trading, and gas utilities. With nearly $19 billion in assets and a dividend yield of 2.51%, it serves as a reliable income vehicle while providing exposure to a robust sector. The ETF’s composition is heavily weighted towards electric utilities (57%) and multi-utilities (25.9%). Despite its impressive rally, the ETF’s Relative Strength Index (RSI) suggests that it has not yet reached overbought conditions, leaving ample room for further growth. Analysts have rated XLU as a Moderate Buy, with a consensus price target indicating potential upside.
NextEra Energy: A Sector Giant Positioned for Growth
NextEra Energy (NYSE: NEE), the largest holding in XLU at 14.12%, stands as a dominant player within the utilities space with a market cap of $173 billion. The company is well-diversified, operating both fossil-fuel and green energy generation, affirming its leadership position in both traditional and renewable sectors. With a 2.4% dividend yield and a forward P/E ratio of 22.9, NextEra presents a balanced mix of income and growth trajectories. Its renewable energy backlog saw an uptick to 22.6GW in Q2, from 21.5GW in Q1, suggesting robust demand and growth momentum as it aims for 40GW by 2024-2027. As demand from AI-driven data centers and onshoring activities burgeons, electricity usage is expected to vicariously benefit NextEra. Furthermore, the recent 20-year license renewal of its Turkey Point Nuclear Plant solidifies its crucial role as an energy provider in South Florida. With upcoming earnings slated for release on October 23, analysts anticipate a 7.29% increase in profits this year, building on last quarter’s strong financial performance of $0.96 EPS, which exceeded estimates by $0.03.
Vistra: A Utility Stock Riding the AI Boom
One particularly compelling player in the utilities sector is Vistra (NYSE: VST), which has witnessed a staggering 252% increase YTD. Noteworthy investor Stanley Druckenmiller sold his NVIDIA shares in 2023 and has since invested in Vistra, signaling optimism about the company’s future as a cornerstone for AI infrastructure. Aligning its business model with escalating electricity demand, Vistra operates a generation capacity of 41,000 MW, including 6,400 MW from nuclear energy, while holding the second-largest energy storage capacity in the U.S. at 1,020 MW. With AI-driven data centers and semiconductor foundries rapidly increasing their power necessities, Vistra is ideally positioned to cater to that demand. Analysts express a bullish sentiment with 10 Buy ratings and a consensus price target of $141.30, implying an approximate 8% upside potential. Notably, Vistra’s recent acquisition of Energy Harbor fortifies its energy storage capabilities and nuclear energy production, setting the stage for sustained growth.
Conclusion
The utilities sector’s performance in 2024 is a testimony to the old axiom of not underestimating the power of consistent, fundamental growth. As circumstances evolve, a well-chosen utility stock could very well serve as a bedrock within a diversified portfolio, especially for those conservative investors wary of the volatility present in the tech and healthcare sectors. So, consider these utility plays as you look to fortify your investment strategy moving forward.