Energy Business

Why Utility Stocks Are Starting to Look Cheap

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Utilities have been one of the worst-performing sectors in 2015 thus far. But is now a good time to buy? Credit Suisse’s Dan Eggers answers this question in the firm’s most recent report regarding the sector.

Overall, the firm believes that the downward spiral in regulated utility stocks is clearly rooted in following the playbook to sell utility stocks ahead of the fed funds tightening. Credit Suisse appreciates the “easiness” of making this macro call, but thinks the market has well overshot to the downside as it digs into the data and looks at the state of the industry today versus the historic points of reference.

The firm acknowledged its enthusiasm for the utilities group was early. Credit Suisse appreciates that utilities could still be volatile, but it thinks very valid arguments can be made that utilities look cheap against both the S&P 500 and interest rates. The firm sees the group doing well from these levels, with preferred names including DTE Energy Co. (NYSE: DTE), PG&E Corp. (NYSE: PCG), American Electric Power Co. Inc. (NYSE: AEP), NextEra Energy Inc. (NYSE: NEE) and newly upgraded Pinnacle West Capital Corp. (NYSE: PNW).

The brokerage firm now has these Outperform ratings for all these stocks, with the following price targets:

  • DTE, $95
  • PG&E, $61
  • American Electric Power, $69
  • NextEra, $120
  • Pinnacle West, $71

Both the transparency of the Federal Reserve and the perpetual delays in action are arguably prolonging the trade, as the market keeps resetting the negative call on utilities as we wait on the Fed to act.

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Credit Suisse detailed in its report:

Utilities perform much better after the Fed starts to act with dividend yields moving very little as the Fed funds rate / utility dividend yield spread narrowing 25 to 420 basis points with the Fed funds rate going to a premium against utility dividend yields in each case. For details refer to our full report.

Shares of DTE closed up 0.7% at $75.19 on Wednesday. The stock has a consensus analyst price target of $87.33 and a 52-week trading range of $71.60 to $92.27.

PG&E shares closed up 0.6% to $49.39, in a 52-week trading range of $42.92 to $60.21. The consensus analyst price target is $56.82.

American Electric Power shares closed up 0.6% to $53.29, in a 52-week range of $49.06 to $65.38. The consensus price target is $61.11.

NextEra shares closed up 0.4% at $98.43. The 52-week range is $90.33 to $112.64. The consensus price target is $117.17.

Pinnacle West shares were up 1.2% to $57.58, in a 52-week range of $52.13 to $73.31. The stock has a consensus price target of $63.57.

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