Amid a still-stubbornly high backdrop of inflation, the narrative for utilities stocks to buy stands as a cynical bright spot. Basically, everyone must pay their bills associated with core services. Otherwise, no pay, no play.
Fundamentally, utilities stocks benefit from a natural monopoly. Legally speaking, an enterprise could potentially compete with a utility powerhouse. However, the barriers to entry – from the costs involved and the regulatory hoops – prevent would-be rivals from even trying. Therefore, these established giants can almost do whatever they want.
Second, there’s no trade-down effect involved with utilities stocks because it’s a binary proposition. Unless you go off the grid completely, you either have the critical service or you don’t. Therefore, folks pay up because they have no choice, which bodes well for the below entities.
Duke Energy (DUK)
A seemingly top-tier idea among utilities stocks to buy, Duke Energy (NYSE:DUK) theoretically should be performing a lot better than it has. An electric power and natural gas holding firm, Duke provides coverage to compelling regions, such as the Carolinas. With millennials increasingly moving to these places on or near the eastern coastline, Duke operates where the money is going.
However, since the January opener, shares have slipped more than 13%. In the trailing one-year period, DUK lost almost 10%, which doesn’t seem congruent with its relevance. However, a look at Fintel’s options flow screener – which targets big block trades likely made by institutions – presents an encouraging canvas.
While options trades in September have been decidedly bearish, the most recent transaction provides hope. Basically, a major trader (or traders) sold 10,000 contracts of the Nov 17 ’23 85.00 Put, collecting a $1.06 million premium in the process. In my opinion, that seems aggressively bullish. Also, analysts peg DUK as a moderate buy with a $99.75 target, implying nearly 11% upside potential.
Exelon (EXC)
Headquartered in Chicago, Illinois, Exelon (NASDAQ:EXC) is the largest electric parent company in the U.S. by revenue, per its public profile. Given its massive footprint, one might expect EXC to perform well. However, the opposite is true. Since the beginning of this year, EXC has fallen a bit over 10%. In the past 365 days, shares have gone nowhere, dipping 2%.
Adding to the worries, major options traders in this case seem bearish on Exelon. For example, on Sept. 26, a trader bought 672 contracts of the Nov 17 ’23 36.00 Put, paying a premium of nearly $27,000. On Aug. 22, a trader (or several traders) sold 2,708 contracts of the Oct 20 ’23 42.00 Put, collecting a premium of $144,716.
However, the risk for the shorts is that all it takes is a rotation away from speculation and toward more reliable entities. You can’t get much more reliable than massive utilities stocks to buy. If you want to go contrarian, analysts rate EXC a strong buy with a $44.44 price target, implying 15% upside.
PG&E (PCG)
One of the top utilities stocks, PG&E (NYSE:PCG) provides electricity and natural gas service to much of Northern and Central California. Right there, PG&E deserves a look for its massive relevance. Love it or hate it, the Golden State represents the economic engine of the U.S. Without California, our nation wouldn’t quite be the massive superpower that it is.
Sure enough, investors seem to recognize this overwhelming catalyst. Since the start of the year, PCG gained just under 5%. That’s nothing to write home about but relatively speaking, that’s a decent run. Still, investors should be aware of some storms brewing in the derivatives market. Specifically, a major trader sold 2,601 contracts of the Nov 17 ’23 17.00 Call, collecting a $158,539 premium.
While that’s distracting, keep in mind that PCG stock closed recently at $16.44. All it needs is an understanding that investors may prefer risk-off assets as opposed to risk-on. Thus, it’s possible that PCG can swing higher, blowing up this apparently bearish trade. Oh yeah, analysts rate shares a strong buy with a $19.33 price target.
Sempra Energy (SRE)
While Sempra Energy (NYSE:SRE) as a business doesn’t get much love from its users, it does plenty to earn the respect of shareholders. Actually, I’m not sure if that’s true in the active sense. Rather, Sempra benefits passively by covering segments of the extremely lucrative Southern California market. As stated earlier with PG&E, California represents an economic powerhouse just by itself. So, SRE is one of the utilities stocks to buy.
In fairness, though, it doesn’t seem that way. Since the January opener, SRE slipped almost 10%. In the past 365 days, the security gave up nearly 12% of its equity value. And sure enough, institutional traders seem pessimistic about SRE. For example, an entity sold 1,901 contracts of the Nov 17 ’23 75.00 Call on Sept. 21, collecting a nearly $230,000 premium.
With SRE down at $69.41 recently, that might seem like a good trade. But Sempra’s consistent profitability could move the needle to the upside, blowing up this bear trade. Lastly, analysts peg shares as a moderate buy with an $82.15 price target, implying over 18% upside.
NiSource (NI)
A concocting mix between speculation and opportunity, NiSource (NYSE:NI) is one of the largest fully regulated utilities stocks in the U.S. Per its public profile, NiSource services approximately 3.5 million natural gas customers and half a million electric customers across six states. That seems powerfully relevant. Unfortunately, NI shares have fallen more than 8% since the January opener.
In the past 365 days, NI dipped 7.5%. And in the trailing five years, shares only gained 1%, reflecting how many investors turned to risk-on assets. Adding to the concerns for NI, major traders have been bearish. For instance, on Sept. 27, an entity (or entities) bought 6,099 contracts of the Oct 20 ’23 25.00 Put, paying a premium of $202,500.
With shares trading hands at $25.18 recently, it seems this put will go in the money (ITM). However, implied volatility (IV) runs higher on the far out-the-money (OTM) calls than the OTM puts. In other words, I see a clear risk to the bears that investors will rotate toward more reliable ideas. Finally, analysts rate NI a unanimous strong buy with a $30.80 price target.
American Electric Power (AEP)
A major investor-owned electric utility in the U.S., American Electric Power (NASDAQ:AEP) delivers electricity to more than five million customers in 11 states, according to its corporate profile. Also, AEP ranks among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity. Sadly, investors don’t seem to care right now.
Since the January opener, AEP fell 20%. In the trailing one-year period, AEP gave up about 19% of its equity value. Since the spring doldrums of 2020, AEP has gyrated wildly across the map. In addition, the volatile swings have attracted bearish attention. Looking at Fintel’s options flow screener, the latest major transaction (Sept. 21) involved the selling of 1,000 contracts of the Oct 20 ’23 82.50 Call.
Overall, the net profile seems bearish on AEP. However, it appears that the institutional options trades will expire on Oct. 20. It’s possible that without this overhang beginning the following Monday, AEP might move higher. It’s speculation, of course. Still, AEP carries a strong buy rating with a $93.38 target, implying over 23% upside potential.
NextEra Energy (NEE)
On paper, NextEra Energy (NYSE:NEE) seems a shoo-in for utilities stocks to buy. One of the most popular companies given its focus on renewable energy, NextEra commands about 58 gigawatts (GW) of generating capacity. Per its public profile, the company is the largest electric utility holding company by market capitalization. Sadly, it’s not really looking too special in the charts.
Since the start of the year, NEE fell more than 28%. Conspicuously, the security gave up nearly 12% of its equity value just in the past one-month period. And even with the decline in market value, NEE trades at a forward earnings multiple of 17.65x. That’s above the sector median of 13.94x, thus ranking worse than 82.48% of the competition.
Interestingly, a major trader appears to have bought 4,110 contracts of the Jan 19 ’24 80.00 Put, paying a premium of $3.65 million. This premium represents 10.86 standard deviations above the mean, which is worrying. Still, if NEE bounces back, it could hurt the bears. Interestingly, analysts rate NEE a strong buy with an average price target of $85.46.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.