Utility stocks have historically been defensive, dividend-focused plays, but so far this year, utilities have become a hot sector among more aggressive investors. This is largely because of the impact of the AI revolution on electricity demand. Yet, while many utilities have become great growth opportunities, plenty of utility stocks remain to sell.
You can divide these utilities to sell into three categories. First, there are utility stocks with larger issues, which counter the possible AI-related tailwind. Second, some utilities do not benefit from this growth trend.
Third, there are utilities that, while perhaps not out of the running when it comes to profiting from the AI growth trend, have excessive capital expenditure needs that the juice may not necessarily be worth the squeeze.
Here’s an example of each one, with three utility stocks to sell.
Hawaiian Electric Industries (HE)
Hawaiian Electric Industries (NYSE:HE), or HEI, owns Aloha state’s regulated electric utility company. In addition to this main operating unit, HEI has interests in banking and renewable energy.
Over the past year, HE stock has fallen in price by over 70%. On a screener, shares may look like a steal, with a forward price-to-earnings (P/E) ratio of just 5.8. However, there’s a good reason why HEI trades at fire sale prices. It has to do with fire: the wildfires that decimated the Hawaiian island of Maui last August.
HEI’s negligence is alleged to have worsened the disaster. According to estimates from research firm Capstone, this leaves HEI potentially on the hook for nearly $5 billion. The company may be fighting against being declared liable, but as this legal headwind continues to hang over HEI, consider it best to stay away from the stock.
NextEra Energy Partners (NEP)
Many utilities may be poised to benefit from the latest growth trends in the sector. However, one sell-side firm has said that NextEra Energy Partners (NYSE:NEP) is not one of them. NEP, a master limited partnership (MLP) managed by utility company NextEra Energy (NYSE:NEE) rallied alongside its parent during April and May.
However, in a May 23 research note, JPMorgan Chase’s Mark Strouse argued that NEP, which primarily owns clean energy assets, is not benefiting that strongly from the power generation growth trend. Investors took the research note, which also detailed other negatives with the MLP, to heart.
Shares pulled back shortly after that. NEP has since traded sideways. Although income-focused investors may find its high distribution yield appealing, the other issues cited by Strouse could impact distributions down the road. With this, consider NEP one of the utility stocks to sell.
National Grid (NGG)
U.K.-based utilities company National Grid (NYSE:NGG) owns utility assets on both sides of the pond. These assets include electric utilities throughout Great Britain and electric and gas utilities throughout the northeastern United States.
Utilities are investing billions to upgrade their systems for the in-progress pivot towards renewable energy. However, in the case of National Grid, these necessary upgrades perhaps warrant a downgrade for NGG stock. At least, that’s the view of Seeking Alpha contributor Euro Invest.
Last month, the commentator argued that National Grid faces significant upgrade-related capital expenditures. Euro Invest anticipated big increases to NGG’s debt position ahead. Still, since publication of his bear case, it’s become clear that funding the nearly $75 billion in upgrades will also entail shareholder dilution. NGG has already pulled back on the capital raise news. Still, this factor may lead to more declines, so stay away.
On the date of publication, Thomas Niel did not hold (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.
