We recently published a list of 7 Cheap Utility Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where American Electric Power Company, Inc. (NASDAQ:AEP) stands against other cheap utility stocks according to hedge funds.
The global utilities industry encompasses three primary sectors: electricity, natural gas, and water. It plays a crucial role in the safe, secure, and sustainable generation, transmission, and distribution of these essential resources.
A major provider of energy in most countries, electricity stands as a notably interesting component of the overall utility industry. The EIA’s Short-Term Energy Outlook report projects a 3% increase in U.S. electricity generation this year compared to 2023, driven mainly by a surge in solar power, with natural gas also playing a key role. However, utilities are struggling to gain customer support for their sustainability goals, which are crucial for justifying rate cases, funding infrastructure projects, and encouraging changes in consumer behavior. This, along with aging infrastructure, has led to steadily rising operating expenses for transmission and distribution, particularly for major investor-owned utilities over the past decade. With summer cooling costs expected to increase by 8% this year, both residential and business customers are becoming more concerned about energy prices. Meanwhile, although 80% of U.S. utility customers are served by providers with a 100% carbon reduction target, the J.D. Power 2024 Sustainability Index shows that only 21% of them are aware of their utility’s efforts to reduce carbon emissions.
However, there have also been significant developments in the opposite direction, particularly with the utility sector partnering with the tech industry, largely fueled by advancements in artificial intelligence (AI). Major players like Microsoft Corporation are making significant strides in this space, primarily due to nuclear power’s capability to support the energy-intensive demands of AI applications while aligning with lower carbon footprint goals. In that regard, Goldman Sachs projects that by 2030, AI data centers will more than double their electricity consumption, reaching 8% of the U.S. total. Coupled with the rising adoption of electric vehicles, the demand for power is set to grow even further. Speaking on the relationship between the utilities sector and AI, Tom Essaye from Sevens Report Research noted:
“AI growth story only adds to what is a bullish set up for utilities that already includes 1) Falling bond yields (makes high dividend equities like utilities more attractive to income investors) and 2) A slowing economy (which boosts demand for less economically sensitive stocks).”
In early August, utility stocks offered investors a rare glimmer of hope amid a broader U.S. market selloff, as market turbulence drove a shift away from the tech stocks that had fueled gains for most of the year. Historically, utilities have been the top-performing sector during the six months surrounding the first rate cut in an economic cycle, according to a Goldman Sachs analysis.
Supporting this trend, the Federal Reserve’s recent decision to cut interest rates by 0.5%, or 50 basis points, is expected to benefit developers and sponsors of renewable energy projects. “The start of a rate-cutting cycle will jumpstart projects,” said Mona Dajani, partner and global co-chair of energy, infrastructure, and hydrogen at Baker Botts. Dajani pointed out that the initial rate cut was deeper than expected, highlighting that a rate-cutting cycle typically doesn’t begin with a 50-basis-point reduction:
“I think that’s a good indicator, like putting your money where your mouth is. The market was expecting 25, but it felt good. It’s huge. And I think that as a whole, clean energy is one of the big winners.”
Dajani added that the market anticipates the Fed cutting rates by a total of 100 basis points by year-end, which “would facilitate the expansion of the domestic supply chain for clean energy, making it easier to finance and build new factories for solar, batteries, EVs, and wind.”
Our Methodology
To compile our list of undervalued utility stocks favored by hedge funds, we used stock screeners to identify companies with forward price-to-earnings (P/E) ratios below 20 as of September 26, which are also well-regarded by analysts. The selection is based on the popularity of these stocks among the 912 hedge funds tracked by Insider Monkey and is ranked in ascending order based on the number of hedge funds holding each stock.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A series of large electrical transmission towers providing power to the public.
American Electric Power Company, Inc. (NASDAQ:AEP)
Forward P/E as of September 27: 16.97
Earnings Growth this year: 7.00%
Number of Hedge Fund Holders: 35
American Electric Power Company, Inc. (NASDAQ:AEP) is a diversified utility that serves over 5 million customers across 11 states, delivering electricity through an extensive network of power plants, transmission, and distribution lines. The company generates power from a mix of renewable and traditional energy sources.
In the second quarter, American Electric Power Company, Inc. (NASDAQ:AEP) reported operating earnings of $1.25 per share, up $0.12 from the previous year. The company reaffirmed its full-year operating earnings guidance, targeting a range of $5.53 to $5.73 per share, and expects a long-term earnings growth rate of 6% to 7%. Commercial load increased by 12.4% year-over-year, driven by a 20%+ rise at its Transmission & Distribution companies as new data processing centers came online. Additionally, AEP has secured customer commitments for over 15 gigawatts of additional load by the end of the decade.
BMO Capital Markets recently raised AEP’s price target to $109, maintaining an Outperform rating. This follows the company’s consideration of selling a minority stake in its transmission companies, a move that could impact the company’s earnings per share and credit metrics.
As of the end of Q2 2024, 35 hedge funds held positions in AEP, up from 28 in the previous quarter, with total stakes valued at $1.6 billion, according to Insider Monkey. GQG Partners held the largest position in the company during the quarter.
Overall, AEP ranks 5th on our list of Cheap Utility Stocks to Buy According to Hedge Funds. While we acknowledge the potential of AEP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AEP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.