Usually, you’d think that a once-in-a-century pandemic that ground the biggest economies in the world to a halt would support a more cautious view. But due to a variety of factors including artificially low borrowing costs and government stimulus checks, millions of consumers opted on an acquisition spree. While that’s encouraging for growth names, you may still want to consider utility stocks.
For one thing, while the major indices have continued to impress, there has been a decided lull in the robustness of bullish price action. During the first half of the year, the venerable Dow Jones Industrial Average gained nearly 13%. But from the second half of the year going into the Aug. 20 session, the Dow has only gained about 1%. In my view, this may set the stage for utility stocks.
True, no one knows for sure what will happen next. It’s just as possible that the Dow continues to soar. But after so much speculation, the natural tendency is to correct prior upside. Moreover, stock trading on margin — a statistic that kept generating high after record highs — finally saw a downtrend for the July reading relative to June. If investors are rolling back risk, then utility stocks are the place to be.
Fundamentally, the underlying sector is much more stable than others. For instance, during the worst of the Great Recession, the U.S. Bureau of Labor Statistics shows that employment in the utilities industry increased. Following the novel coronavirus pandemic, sector employment is down 1.6% just prior to the crisis. In comparison, the national employment level is down 3.8% from February 2020. Thus, on stability alone, utility stocks make a great argument.
I’ve been saying this for a long time about this market segment: bad things happen when people flip the switch and the lights don’t turn on. Since we’re talking about one of the few mission-critical sectors, you can reasonably trust these utility stocks.
- American Water Works (NYSE:AWK)
- Duke Energy (NYSE:DUK)
- Southern Company (NYSE:SO)
- Sempra Energy (NYSE:SRE)
- NextEra Energy (NYSE:NEE)
- Sunnova Energy (NYSE:NOVA)
- Enel Americas (NYSE:ENIA)
Similar to any other investment idea, diversification is important. I’m not suggesting that you throw all your money into utility stocks — that would likely not be wise. Instead, consider edging your way into this sector. With brewing uncertainties in the market and the global economy, you want to have some defensive exposure in your portfolio.
Utility Stocks to Buy: American Water Works (AWK)
Water resources have been in the news lately and not for the reasons we’d hope. In June of this year, The Hill stated that Lake Mead’s decline in water levels points to a scary future in the western region of the U.S. Decreases there have serious implications for the states of Arizona, California, Colorado, Nevada, New Mexico, Utah and Wyoming.
This dynamic doesn’t have the greatest correlation with American Water Works, which is mostly concentrated in the eastern part of the country. However, American Water does serve California, which represents both an economic and agricultural powerhouse. As water for any purpose rises in demand, it’s logical that the price of AWK stock will likewise move higher. Therefore, it’s one of the utility stocks to keep a close eye on.
But it’s not just about technical sentiment. Last year, the company generated revenue of nearly $3.8 billion, up almost 5% from 2019’s result. As well, momentum has carried over this year, with its second quarter of 2021 sales up over 7% against Q2 2020 revenue.
Duke Energy (DUK)
Duke Energy is what I would term an oldie but a goodie. I’ve spoken about the company multiple times before and it’s simply a solid bet if you’re interested in leveraging the stability of utility stocks against potential uncertainty.
According to its website, “Duke Energy offers energy services to approximately 7.4 million customers in the Carolinas, Florida, Ohio, Kentucky and Indiana, and retail natural gas services to more than 1.5 million customers in the Carolinas, Ohio, Kentucky and Tennessee.” Personally, I think this is significant from a forward-looking demographic trends angle.
First, places in North Carolina rank among the most popular millennial destination spots. As well, Tennessee (particularly Nashville) has proven popular with young people looking to relocate in a comfortable environment with lower costs of living relative to coastal metropolitan areas. Therefore, Duke should start generating more revenue as migration trends continue — after all, places like California are not getting any cheaper.
Second, the company already generates solid results now. In its Q2 report, Duke posted $5.8 billion in sales, up 6% from the year-ago quarter.
Utility Stocks to Buy: Southern Company (SO)
Billed as a leading energy company serving nine million customers through its subsidiaries, Southern Company offers “electric operating companies in three states, natural gas distribution companies in four states, a competitive generation company serving wholesale customers across America, a leading distributed energy infrastructure company, a fiber optics network and telecommunications services.”
As you might imagine, Southern Company has its core business in the southeastern region of the country, hence its name. Admittedly, this brings up a mixed bag in terms of demographic trends. According to the U.S. Census Bureau, two Alabama cities — Montgomery and Mobile — saw some of the largest decreases in population, which is never a positive.
At the same time, Georgia is among the five states that gained more than 50,000 housing units between 2018 and 2019, with a tally of 53,000. The others on this list are Texas (185,000), Florida (128,000), California (91,000) and North Carolina (64,000). Since the housing shortage is a huge issue, Georgia and perhaps other southern states could see a bump up in population, thereby bolstering the case of SO as one of the utility stocks to buy.
Sempra Energy (SRE)
If you’re not under Sempra Energy’s coverage map, consider yourself lucky. I’ve spoken to several people who have, though, and I have yet to receive a positive feedback. Of course, that’s just an anecdotal tale but I mention it because there might be a lot of folks that are ready to tear me apart for mentioning SRE in this list of utility stocks to buy.
For the aggrieved, let me gently say that it’s important to separate the service experience from the investment narrative. But even that might seem ludicrous to those who have been paying attention to demographics-based migration patterns.
Mainly, the mainstream media inundates us with stories that young people are leaving southern California for more affordable states. While that might be true to an extent, the overriding reality is that California is not only the biggest economy in the U.S., it will likely stay that way forever for three reasons: it’s a coastal state, an international border state and one with a year-round temperate climate.
Therefore, buying utility stocks in this part of the nation makes perfect sense — even if it doesn’t make personal sense.
Utility Stocks to Buy: NextEra Energy (NEE)
One of the most contentious topics in society (especially if you come from a faith-based background) is the idea of manmade climate change. A common teaching in evangelical institutions is that it’s arrogant to believe that mere humans can change the environment. However, there has to be a time when facts trump beliefs.
Primarily, our own government agencies have been warning for years about global warming. If that wasn’t convincing enough, scientists have noted the additional risk of forest fires due to shifting environmental factors. Finally, Smithsonianmag.com reported that nearly 10 million acres of land are burning in Siberia — yes, Siberia!
At the same time, we can’t ignore the massive energy needs of modern societies. Therefore, NextEra Energy, a specialist in renewable energy technologies, can help provide a solution. To be fair, NEE slipped earlier this year (as did many other green utility stocks) due in part to concerns about the intermittency of renewable power.
However, unfolding events regarding climate change have shifted the focus favorably to green solutions. Thus, NEE is one to watch for the long run.
Sunnova Energy (NOVA)
Although renewables-focused utility stocks generate much attention for their relevance, there’s one issue that many investors have: so many of these names are regurgitated endlessly across various media outlets. I’m not taking anything away from NextEra Energy, but even I admit that I’ve discussed this company more times than I care to remember.
Thus, if you want to go off the beaten path with clean energy utility stocks, you may want to consider Sunnova Energy. Focusing on solar power and battery storage solutions for the residential market, Sunnova already enjoyed a strong and rising addressable market prior to the pandemic. Following the public health crisis and the myriad blackouts that occurred throughout the U.S. last year, you can reasonably assume that solar and battery demand will soar moving forward.
Like other clean energy utility stocks, though, Sunnova isn’t without its faults. Although revenue growth is strong, the company isn’t profitable, with plenty of red ink dotting the net income line. However, as we settle into the new normal, demand for less reliance on the grid could boost NOVA stock.
Utility Stocks to Buy: Enel Americas (ENIA)
If you want to go defensive with utility stocks, I firmly believe that buying American makes the most sense. Although huge problems exist in this country, pound-for-pound, it’s hard to argue that any other nation has the same magnitude of fairness and transparency under the law combined with robust economic opportunities.
Still, the main challenge for U.S.-based utility stocks is that the underlying economy is a mature one. Therefore, you might not get significant capital gains, instead relying on passive income to get you through. That being the case, if you want to dial up the risk factor in this industry, you may want to consider Enel Americas.
According to its website, Enel Americas and its subsidiaries “generate, transport and distribute energy in four South American countries: Argentina, Brazil, Colombia and Peru.” One of the reasons why the region is so viable is due to the favorable population pyramid — simply, there are more younger people than there are older.
As well, South America is a popular destination spot for American and western retirees due to an affordable cost of living. Therefore, Enel may enjoy an influx of not only people but folks with serious purchasing power.
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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.