We recently published a list of 10 Most Undervalued Utility Stocks to Invest in Now. In this article, we are going to take a look at where Xcel Energy Inc. (NASDAQ:XEL) stands against other most undervalued utility stocks to invest in now.
EY believes that utilities are required to balance growing energy demands, decarbonization goals and customer satisfaction while, at the same time, navigating regulatory and financial challenges. Therefore, creative funding and strategic partnerships remain critical to financing ambitious energy projects amid elevated capital costs. Modernization of infrastructure can lead to a sustainable and resilient energy future, supporting providers and consumers.
Favourable Outlook for US Utilities Sector
As per Morningstar, one of the critical shifts in the US utilities sector is the strong growth of renewable energy sources. Over the past decade, declining costs for wind and solar projects and state-mandated renewable energy targets resulted in strong investments in clean energy. Utilities are required to innovate and invest in smart-grid technologies and battery storage in a bid to accommodate the growing influx of renewable energy. Such advances are expected to ensure grid reliability and efficiency with an increase in renewable energy’s share of the generation mix.
One of the critical components of the moats in the utilities sector is the regulatory framework in which they operate, says Morningstar. The requirement for regulatory approval and oversight to set customer rates tends to limit competition, but it also restricts utilities’ earnings. The regulatory environment ensures their ability to operate with predictable cash flows. The next aspect is the requirement for large capital investment. Building and maintaining the infrastructure required for electricity, gas, and water distribution requires significant capital, with regulators limiting the returns utilities can generate on such investments. Therefore, rate regulation and the requirement of reliable and consistent energy supply result in stable demand and predictable revenues, attracting investors who want low-risk and steady returns.
Historically, the US electricity demand has reflected the economic growth, averaging ~2% annually, says Morningstar. That being said, since 2000, this relationship continued to weaken because of improvements in energy efficiency and lower industrial electricity use. As a result, electricity demand has remained flat since 2007. However, the firm believes that revival seems to be on the cards. Several factors are expected to fuel renewed growth in electricity demand.
These include the proliferation of EVs, diminishing returns on energy-efficiency advancements, and surge of data centers because of advancements in AI. The utility companies are required to prepare themselves for higher demand by making investments in grid capacity and reliability. They can also make alliances with EV manufacturers and charging network providers so that they can capitalize on the dynamic EV market, added Morningstar.
Our Methodology
To list the 10 Most Undervalued Utility Stocks to Invest in Now, we used a screener to shortlist companies catering to the broader utilities sector. Next, we filtered out the stocks that trade at a forward P/E of less than ~20x. We also mentioned hedge fund sentiments around each stock, as of Q4 2024. Finally, the stocks were arranged in ascending order of their hedge fund sentiments.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
Is Xcel Energy Inc. (XEL) the Most Undervalued Utility Stock to Invest in Now?
A vast expanse of solar panels stretching as far as the eye can see.
Xcel Energy Inc. (NASDAQ:XEL) is engaged in the generation, purchasing, transmission, distribution, and sale of electricity. Evercore ISI upped the company’s price target to $74 from $70, keeping an “Outperform” rating. The firm has an optimistic outlook for the broader power and utilities group as it believes that improvement in fundamentals and a positive valuation backdrop are expected to support outperformance through H1 2025. As per the analyst, factors including moderation in inflation, potential future interest rate cuts, and elevated electricity demand can act as tailwinds for Xcel Energy Inc. (NASDAQ:XEL).
Evercore expects increased investment in utility infrastructure, mainly because of data centers, with more deals and announcements expected in 2025. Elsewhere, Neil Kalton from Wells Fargo maintained a “Buy” rating on the company’s stock with a price objective of $75.00. The rating is backed by several factors that demonstrate Xcel Energy Inc. (NASDAQ:XEL)’s growth potential and value.
Despite a marginal underperformance in 2024, its management has reiterated optimism in achieving the midpoint of 2025 earnings guidance, hinting at a robust future earnings trajectory. Notably, Xcel Energy Inc. (NASDAQ:XEL) reaffirmed 2025 EPS guidance of $3.75 – $3.85 per share. Furthermore, the company identified numerous capital expenditure opportunities that can enhance their generation resources and result in long-term growth. Apart from these factors, the analyst also highlighted that manageable liabilities from prior wildfire incidents and mitigation efforts focused on reducing future wildfire risks continue to support the positive outlook.
Overall, XEL ranks 9th on our list of most undervalued utility stocks to invest in now. While we acknowledge the potential of XEL as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for a deeply undervalued AI stock that is more promising than XEL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
