How Did The Once-Overlooked and Boring Utility Industry Become a Driving Force in The Market? – The Average Joe


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    How Did The Once-Overlooked and Boring Utility Industry Become a Driving Force in The Market?

    Noah Weidner

    May 17, 2024

    The wild meme stock moves of last week taught some investors a costly lesson: investing is boring, and it should stay that way. But one industry is proving that investing can be both boring and lucrative. Surging electricity demand has already boosted independent power producers and energy giants (yawn) — and now, it’s lifting another unlikely and boring beneficiary to record highs.

    Keeping the lights on: The utility sector isn’t typically where traders dream of making their fortune — it’s considered stable. But in 2024, the utilities sector has been the fourth-best performer in the S&P 500. The Utilities Select Sector SPDR Fund ($XLU) is up 12.6% year-to-date (YTD), outpacing the S&P 500 and Nasdaq-100’s 11% returns.

    • Optimistic electricity demand forecasts are helping utilities become a staple of popular AI trades — with a report by Grid Strategies LLC predicting that electricity demand could double over the next five years.
    • Constellation Energy ($CEG), NextEra Energy ($NEE) and Public Service Enterprise GP ($PEG) are up 85%, 24%, and 21% YTD, respectively.

    Recession signal?

    In the first quarter, companies in the utilities sector grew their earnings per share by 30% — the the third-highest in the S&P 500. But rising electricity demand isn’t the only factor driving growth. Renewables, mass battery installations, and more efficient transmission lines have also boosted profits. However, strong returns in this industry haven’t always been good news for investors.

    • Robinhood’s Stephanie Guild says that utilities tend to outperform in “low return environments” like recessions or bear markets.
    • Luckily for investors, Guild says the industry’s current success is more of a result of its strong financial results, with Bespoke Investment Group’s Paul Hickey adding that the sector’s performance doesn’t represent “a big warning sign.”

    Forward-looking: Mizuho analyst Anthony Crowdell notes that the utilities industry is still trading at a 12% discount from the S&P 500, despite the recent run. He believes the sector could continue to benefit from large power deals with big tech companies. On top of a 3% dividend yield, $XLU is trading at an 18x forward price-to-earnings (P/E) ratio, lower than the S&P 500’s 20.7x forward P/E. Crowdell’s top pick in the industry? NextEra Energy.

    Read: The High Cost and Risk of Going Electric: Can America Keep Up with Electricity Demand?

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