Jul 13, 2023

Top Utilities Stocks for June 2023

Enel Chile, Capital Power, and Cadiz lead for value, growth, and momentum, respectively

Anton Petrus / Getty Images

Cadiz Inc. (CDZI), Fluence Energy Inc. (FLNC), and Enel Chile SA (ENIC) are among the top-performing utilities stocks this month, each providing investors with returns in excess of 120% in the past year.

However, the Utilities Select Sector SPDR ETF (XLU), which can serve as a benchmark for the sector, has fallen by 12% in the past 12 months, compared with the Russell 1000 index's 4% gain over the same period.

Below, we look at the top utilities stocks in the categories of best value, fastest growth, and most momentum. All data is as of June 5.

These are the utilities stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows that you're paying less for each dollar of profit generated.

Source: YCharts

These are the top utilities stocks as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly year-over-year (YOY) percentage revenue growth and most recent quarterly YOY earnings-per-share (EPS) growth.

Both sales and earnings are critical factors in the success of a company. Therefore, ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax law or restructuring costs) that may make one figure or the other unrepresentative of the business in general. Companies with a quarterly EPS or revenue growth of more than 1,000% were excluded as outliers.

Source: YCharts

These are the utilities stocks that had the highest total return over the past 12 months.

Source: YCharts

Those who invest in utilities stocks should understand how fluctuations in interest rates can influence their performance. Typically, changing interest rates affect this sector in two ways: competition with fixed-interest securities and the cost of servicing debt.

Competition with fixed-interest securities: Generally, those who invest in this group prefer yield over growth. Therefore, when interest rates are high, these investors favor fixed-interest securities over utilities stocks, as the former provide attractive risk-free returns.

For example, if the U.S. 10-year Treasury note and a utilities stock both yield 3%, risk-averse investors would invest in the Treasury note because it offers the same yield but isn't affected by company or market risk. However, these investors would favor utilities stocks over fixed-interest securities when interest rates are low or falling because the utilities stocks offer greater returns while typically displaying lower volatility than stocks in other sectors.

Cost of servicing debt: Utilities companies carry high debt levels to build, maintain, and upgrade essential infrastructure such as electricity grids, gas pipelines, water systems, and renewable energy sources. Therefore, servicing that debt becomes more difficult when interest rates rise. If utilities companies are unable to pass extra financing costs on to customers, they may be partially borne by investors.

Most utilities companies pay investors steady dividends, as they form part of a regulated industry with highly predictable cash flows. In addition, ongoing demand for their services, irrespective of the economy's health, makes them an attractive safe-haven investment during periods of economic uncertainty, such as during a recession or downturn.

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As of the date this article was written, the author held a long position in ENIC.

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Enel Chile Pampa Energia SA Genie Energy Ltd. Capital Power Corp. PNM Resources Inc. Edison International Cadiz Fluence Energy Enel Chile Competition with fixed-interest securities Cost of servicing debt