Infrastructure

Goldman Sachs Has 3 Utilities With Big Upside on Its Conviction Buy List

The utilities sector has had a pretty ho-hum 12 months. Utilities stocks included in the S&P 500 index have added just 0.58% to their value, compared with a gain of just over 10% for the 500 index itself. For the year to date, utilities stocks are down more than 6% while the S&P 500 trades a shade below flat.

In frothy markets, like the one we’ve been experiencing this year, some investors choose to chase growth rather than steady returns. Barring black swan events like wildfires (remember PG&E) and bribery charges (FirstEnergy’s current problem), defensive plays like utilities usually provide a decent return without a lot of risk and not much drama.

In addition to dozens of routine Buy and Sell ratings, analysts at Goldman Sachs also publish their Conviction Buy List of the firm’s top ideas, generally in mid-cap to large-cap companies. Goldman Sachs just conferred its Conviction Buy rating on three utility stocks, one a yieldco and the others electricity and natural gas suppliers.

Here’s a look at all three, including consensus analyst price targets to indicate whether Goldman Sachs really does have a stronger conviction for these stocks than the average analyst.

NextEra Energy Partners L.P. (NYSE: NEP) is a yieldco that buys, owns and manages contracted clean energy projects and natural gas pipelines in the United States. The company is expected to announce earnings per share of $0.36 and revenue of $338 million on Friday morning. NextEra expects to boost its dividend by some 12% to 15% annually through at least 2024. The company is a subsidiary of NextEra Energy Inc. (NYSE: NEE).

Shares closed at $58.63 on Thursday, in a 52-week range of $29.01 to $61.87 and with a consensus price target of $57.87. At Goldman’s price target of $65, the implied upside on the stock is 11.5%, while the consensus target has already been put in the rear-view mirror. NextEra Energy Partners pays a dividend yield of 3.80% ($2.22 annualized).

NRG Energy Inc. (NYSE: NRG) is both an electricity generator and a distributor to more than 3.7 million U.S. customers. The company has set a goal to be net-zero for carbon emissions by 2050 and to cut its emissions by 50% from 2014 levels by 2025. The company already has achieved more than 80% of its 2025 goal.

NRG shares closed at $33.23 on Thursday, in a 52-week range of $19.54 to $41.78. With a consensus price target of $43.18, the implied upside for the shares is 30%. Goldman’s price target is $47, implying a potential upside of around 42%, about 2.5 times more than the consensus. NRG pays an annual dividend of $1.20 (yield of 3.57%).

Sempra Energy (NYSE: SRE) provides electricity to 3.7 million customers and natural gas service to 3.4 million customers in southern California. The company also operates electricity transmission and distribution lines for 3.6 million homes in Texas, along with facilities in Mexico and liquefied natural gas plants along the Gulf and Pacific coasts. In early June, Moody’s downgraded Sempra’s senior unsecured debt rating from Baa1 to Baa2, not something that would exactly light a fire under the share price. But Moody’s sees substantial benefit from Sempra’s Texas assets and the company’s strong presence in southern California.

Sempra’s stock closed at $127.34 on Thursday, in a 52-week range of $88.00 to $161.87. The consensus price target on the stock is $143.38, while Goldman’s target is $159. The implied upside based on the consensus target is 12.6%, and the potential upside based on Goldman’s target is 24.6%. Sempra pays an annual dividend of $4.18 (yield of 3.27%).