Utility stocks gained 11% over the last month, intriguing investors about which utility stocks to buy next in light of the unusual market outperformance. This is due to two major technology shifts that could lead the sector to strong returns for years.
The first driver is tied to increased energy demand driven by artificial intelligence (AI). A typical AI search uses 15 times more energy than a traditional internet search nowadays. This pushes electricity consumption up for the first time in decades, as AI data centers are expected to need 160% more power by 2030.
The second driver involves the energy transition, as billions in government subsidies have sped up efficiency to reduce greenhouse emissions. Renewables growth should benefit from economies of scale, allowing utilities to cut costs as demand increases.
Traditionally, utilities trade at low price-to-earnings (P/E) ratios and offer attractive dividends due to price stability. However, utility stock price gains are now on par with growth stocks. As such, some utilities may present a relatively cheap way for investors to participate in AI trends while earning solid returns.
Fortis (FTS)
Fortis (NYSE:FTS) is one of the top utility stocks to buy, as its share price has yet to enter growth territory. Trading at a P/E ratio of 17.8x, FTS stock is relatively cheap even compared to the utility sector average of 20.8x.
Fortis owns and operates generating facilities across Canada, the U.S. and Central America. It’s one of the largest electric and gas utilities in North America.
The company benefits from serving markets with established rate regulations and long-term contracts. This positions it for steady customer and revenue growth in the coming years. It has often been considered reliable for dividend-seeking investors. Last year, it entered the “Dividend King” realm after raising its dividend for 50 consecutive years.
While carrying a relatively high debt level common among utilities, expected low interest rates could further boost the company’s valuation moving forward. This is especially true if it keeps beating EPS estimates at the current pace.
Constellation Energy
Constellation Energy (NASDAQ:CEG) is the largest owner of nuclear power plants in the U.S. The company produces power at approximately $25 per megawatt hour, which is below the $45 per megawatt-hour minimum price set by the Inflation Reduction Act (IRA). This guarantees the company an 80% margin on production. Demand for the company’s power is also expected to increase by 10% per year for the rest of the decade.
In its earnings report for the first quarter, Constellation Energy beat expectations by more than 80% despite slower margin growth. This was thanks to a massive jump in profit margin to 14% from 1.3% in the prior year.
The Constellation Energy stock price increased 85% this year, positioning it well as a stable source of affordable energy. Consequently, CEG stock trades at a P/E ratio of 30x. This is above the overall utility sector average but below technology stocks at 45x.
CEG is one of the relatively undervalued utility stocks to buy for investors seeking exposure to the growing clean energy industry while maintaining stability.
Dominion Energy
Dominion Energy (NYSE:D) is the final pick of the three utility stocks to buy. Unlike the other two utility stocks, the electricity company directly targets the growing demand for AI. It recently announced plans to add 15 new data centers as customers this year.
The company’s recent earnings report showed strong growth in the data center business. Profit forecasts rose as much as 23% for the next year. This is not surprising, given that it powers Northern Virginia, the largest data center market worldwide.
Dominion Energy’s stock price has already increased 12% in 2024 as the utility serving the epicenter of data center demand. With electricity demand in the U.S. expected to hit two consecutive new records in 2024 and 2025, analysts project over 40% revenue growth this year. This could offset its slightly lower P/E ratio of 23.4x. Additionally, Dominion offers a 5% dividend yield, providing a solid return regardless of AI’s future impact.
On the date of publication, Stavros Tousios 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.