Infrastructure

5 Top Utilities Expected to Outperform in 2020

With each end of year, Wall Street strategists and analysts make their forecasts for the year ahead. The coming year is expected to extend the current bull market beyond its 10th straight year, and strategists have raised their expectations for the S&P 500. The big question now is how each sector will perform, and a second question is how some of the top players in those sectors will do.

Credit Suisse has issued its 2020 outlook on Utilities & Alternative Energy in a call titled “Getting Meaner and Less Defensive.” For the utilities sector into 2020, the firm sees relative outperformance for integrated utilities, with some non-utility exposure and more reversion to mean among the regulated utilities. The firm sees funds shifting away from the highest defensive P/E stocks and into less expensive value stocks. Credit Suisse has identified some of its favorite Outperform-rated stocks among the integrated and regulated utilities.

According to the team at Credit Suisse, the firm expects that the integrated utilities with non-utility exposure will outperform in 2020 as funds rotate into value. It also noted that utility sector P/E ratios and other valuation metrics have risen steadily since the recession of 2008, but that there has been a reversal of trends that is expected to continue in 2020 as the defensive trade peters out.

Jonathan Golub, the firm’s U.S. equities strategic forecaster, sees a continuation of the cyclical rotation into value and growth stocks that is a move away from low volatility defensive stocks. That may set a cautious tone for utilities ahead, but Credit Suisse has several stocks in the sector it sees outperforming peers and still having upside.

24/7 Wall St. has added color from the Credit Suisse views and compared the current share price to the 52-week highs and the Refinitiv consensus analyst target price. We also have included the dividend yield on each, and, for a reference, the yields on long-term Treasuries was 1.86% on the 10-year note and 2.28% on the 30-year bond.

Exelon Corp. (NYSE: EXC) is rated as Outperform in the integrated utilities group in the firm’s coverage universe. Credit Suisse is looking for political and legal resolution in 2020, along with legislation in Illinois supportive of nuclear and a neutral to positive PJM capacity auction outcome either in late 2020 or in the first half of 2021. Exelon was last seen trading at $44.00 a share, in a 52-week high of $51.18 and with a consensus target price of $52.66. Its dividend yield is 3.3%.

NextEra Energy Inc. (NYSE: NEE) is rated as Outperform, and the firm noted that it continues to benefit from the growth of the renewable industry and stable regulation in Florida. Shares were trading at $236.60 on last look, with a 52-week high of $239.89. Its consensus target price is $244.33, and it has a $116 billion market cap. NextEra’s dividend yield is just 2.1%, now that its share price has risen so much.

Vistra Energy Corp. (NYSE: VST) is rated as Outperform. Credit Suisse noted that the stock has underperformed in recent weeks on unwarranted concerns over weakening reserve margins in Texas. Vistra was most recently at $23.70, with a 52-week high of $27.96 and a consensus target price of $33.20. Its dividend yield is just 2.1%.

Pinnacle West Capital Corp. (NYSE: PNW) is rated as Outperform among the regulated utilities. Credit Suisse noted that Pinnacle trades at a P/E near the bottom compared with its peers and that the resolution of a major rate case and an election next year could reduce uncertainty next year. That said, those events are nearly a year away. Pinnacle West recently traded at $86.20, in a 52-week high of $99.81. The consensus target price is $93.77. The dividend yield is 3.6%.

CenterPoint Energy Inc. (NYSE: CNP) is rated as Neutral, but Credit Suisse sees it possibly benefiting from a better than expected Houston rate case outcome after settlement talks, although the firm remains cautious pending 2020 and long-term guidance reinitiation in February. CenterPoint closed at $25.95, down from a 52-week high of $31.42 and with a consensus target price of $28.10. It has a 4.4% dividend yield.