While even the so-called best utilities stocks will likely never be mistaken for sexy opportunities, they offer exceptional relevance, especially at this juncture. With Wall Street unsure how to digest various macroeconomic news, the utilities space brings some predictability to your portfolio.
No, no one can guarantee upside, irrespective of whether we’re discussing the best utilities stocks or the merely good enough. However, the fundamental narrative is a dependable one. First, utilities benefit from natural monopolies. Basically, would-be competitors don’t even bother because of the steep barriers to entry.
Second, the best utilities stocks are tied to critical services. And that means customers have to pay up, regardless of whatever’s going on with the economy. You’re not going to get this kind of dependency from, say a discretionary retailer.
To further target the most viable opportunities, all of these ideas feature positive endorsement from Wall Street analysts. In addition, I’ll be leaning heavily into options market dynamics. Please refer to this article for a breakdown of the terminologies I’ll be using. With that, let’s dive into the best utilities stocks to buy now.
NRG Energy (NRG)
Based in Houston, Texas, NRG Energy (NYSE:NRG) focuses on energy generation and retail electricity. Per its public profile, NRG’s portfolio includes natural gas, coal, oil, nuclear, wind and distributed solar generation. Since the beginning of this year, shares gained a bit over 19%, closing at $38.02 in the midweek session.
Looking at the NRG’s options chain, its volatility smile presents an intriguing backdrop. From the strike price of $39 where implied volatility sits at a low of 0.24, this metric rises to 0.57 at the $50 strike. Based on the perspective of the call holder, as NRG options move out of the money (OTM), the underlying IV rises. Possibly, this dynamic suggests that at least some traders anticipate a bullish price move over the long run.
To be fair, traders appear to be hedging against significant downside risk, with IV shooting up to 1.15 at the $20 strike. However, volatility appears muted between $30 and $40, suggesting a general confidence in price stability. Finally, analysts peg NRG as a strong buy with a $44.25 average price target, indicating over 16% upside. Thus, it’s one of the best utilities stocks to consider.
Headquartered in Merrillville, Indiana, NiSource (NYSE:NI) is one of the largest fully regulated utility companies in the U.S. Per its corporate profile, NiSource serves approximately 3.5 million natural gas customers and half a million electric customers across six states. Since the start of the year, NI slipped about 4%. On Wednesday, it closed at $26.31.
Turning to the options market, NI’s IV sits at a low of 0.23 at the $25 strike price. Steadily moving toward the OTM prices, IV rises to 0.85 at the $40 strike. This framework may indicate rising confidence that NI may move up in price over the long run. However, traders are also cognizant of the downside risk. Specifically, IV jumps to 2.33 at the $17.50 strike.
However, the deep in-the-money (ITM) lift in IV suggests a mitigation of “tail risk.” Basically, IV spiked perhaps based on traders fear of a sharp crash in NI. However, the more realistic probability points to gradual positive returns. As evidence, analysts peg NI as a unanimous strong buy. Their average price target comes in at $30.67, implying almost 17% upside, making it one of the best utilities stocks.
American Electric Power (AEP)
Hailing from Columbus, Ohio, American Electric Power (NASDAQ:AEP) is a major investor-owned electric utility. Based on its public profile, the company delivers electricity to more than five million customers in 11 states. It also ranks as one of the largest generators of electricity in the U.S. Since the start of the year, AEP lost more than 19% of equity value. Recently, AEP closed at $77.34.
While the red ink in the open market isn’t exactly pretty, it appears that options traders sense the worst may be over. From its volatility smile, IV sits at a low of roughly 0.18 at the $80 strike price. However, it gradually scoots higher to a blistering IV of 1.28 at the $130 strike. This backdrop indicates strong enthusiasm among the smart money that AEP will make a robust comeback.
Even better, while traders are also protecting against downside risk – with IV rising to 0.62 at the $45 strike – the magnitude of volatility is relatively low for deep ITM calls versus far-off OTM calls. Therefore, AEP appears to benefit from bullish leanings. Plus, analysts peg AEP a consensus strong buy with a $94.64 price target, implying nearly 24% upside.
NextEra Energy (NEE)
A popular idea among the best utilities stocks to buy, NextEra Energy (NYSE:NEE) specializes in renewable energy, particularly wind and solar. Per its corporate profile, NextEra represents the largest electric utility holding firm by market capitalization. However, NEE has been off to a rough outing in 2023, shedding almost 22% since the January opener. On Wednesday, NEE closed at $65.69.
Although disappointing for the time being, NEE’s volatility smile suggests a powerfully robust bullish backdrop. At the strike price of $71, IV printed a low of approximately 0.19. However, as NEE calls move toward the far OTM direction, IV rises dramatically. At the strike price of $85, IV stands at 0.62. This framework may indicate long-term optimism for NextEra.
On the other side, the deep ITM strike prices don’t see a wild increase in IV. For example, at $55, IV comes in at only 0.30. Thus, the smart money doesn’t anticipate much movement toward the lower price points. Encouragingly, analysts peg NEE as a strong buy with an $85 price target, implying over 29% upside potential.
Based in Calgary, Alberta, Canada, TransAlta (NYSE:TAC) is an electricity power generator and wholesale marketing company. Per its public profile, TransAlta operates wind, hydro, natural gas and coal power generation facilities. It also focuses on sustainability initiatives. Since the start of the year, TAC gained nearly 6% of equity value. On the midweek session, TAC closed at $9.41.
One of the apparently riskier ideas based on options dynamics, TAC’s IV sits at a low of 0.35 at the $10 strike. From there, IV rises to 2.40 at the $17.50 strike before dipping conspicuously to 1.11 at $20. Still, the overall takeaway is that the smart money anticipates TAC could possibly more than double in value.
On the other side, IV stands at 5.69 at the $2.50 strike, which indicates risk mitigation. It’s possible that traders – while recognizing the upside opportunity – also see tail risk.However, analysts peg TAC as a consensus strong buy. Moreover, their average price target stands at $13.87, implying over 47% upside potential. Thus, it still makes a case for best utilities stocks to buy now.
Diving into the higher-risk, higher-reward ideas for best utilities stocks, AES (NYSE:AES) is a utility and power generation firm. Headquartered in Arlington, Virginia, AES owns and operates power plants, which it uses to generate and sell electricity to end users and intermediaries. While a relevant business, AEP has struggled in the market this year. Since the January opener, shares fell 38%.
On Wednesday, AES closed at $17.43. Turning to its volatility smile, IV sits at a trough of 0.28 at the $18 strike. Moving in the OTM direction, IV steadily rises, almost in a linear fashion. At the apex, IV clocks in at 1.72 at the $32 strike. This suggests brewing sentiment for a bounce back among traders despite the open market’s crimson-stained sessions.
Still, traders are accounting for downside risk. IV also rises rather acutely from the $16 strike moving deeper ITM. At $10, IV comes in at 1.37. Still, for the dice rollers, AES might be intriguing. First, it carries a strong buy consensus among analysts. Second, their average price target lands at $26.29, implying nearly 51% growth.
Based in Framingham, Massachusetts, Ameresco (NYSE:AMRC) specializes in comprehensive energy efficiency and renewable energy solutions. In addition to conducting energy audits for the purposes of infrastructural improvements, Ameresco provides myriad other services, including energy storage, microgrids and asset sustainability and maintenance. However, since the January opener, AMRC fell nearly 24%. On Wednesday, shares closed at $42.49.
Though risky, traders appear to see upside potential, at least for the short to intermediate term. At the $45 strike price, IV sits at 0.46. From there, it shoots up to 1.38 at the $55 strike. Subsequently in the OTM direction, IV becomes choppy, peaking at 1.50 at $80. It then falls to 0.89 at $90. Again, traders may see short-to-intermediate-term profitability potential while waiting out the long term.
As for risks, IV stands at a peak of 1.64 at the $25 strike. However, deep ITM IV doesn’t get elevated until $35. Thus, traders may anticipate relative predictability at the current open market price. For the gamblers, analysts peg AMRC as a unanimous strong buy. Their price target hits $65, implying 53% upside. If you’re seeking big gains, this could be one of the best utilities stocks.
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.