We recently compiled a list of the 10 Best Electric Utility Stocks To Invest In. In this article, we are going to take a look at where CMS Energy Corporation (NYSE:CMS) stands against the other electric utility stocks.
Utilities have historically been seen as defensive assets, so the combination of strong economic growth, technological excitement, and higher bond yields has created an unusual backdrop for their recent outperformance. In 2023, the U.S. power and utilities sector made significant strides in decarbonization, setting new records in solar power deployment and energy storage, and enhancing grid reliability and flexibility. The sector experienced mixed fundamentals, with mild weather leading to a slight decline in electricity sales. Wholesale electricity prices fell alongside lower natural gas costs, yet high capital expenditures for grid modernization and decarbonization, along with rising interest rates, contributed to potential increases in customer bills.
In 2024 however, the utility sector seems to have outperformed the broader market, diverging from its typical sensitivity to long-term interest rates. Jefferies analysts, in a report released on September 19, attributed this outperformance to AI-related growth opportunities and the sector’s defensive nature amid a softening economy. With falling rates, rising electricity usage, and expectations for increased data center demand linked to AI, the typically stable utility stocks have seen an unprecedented rally. This trend has driven gains in ETFs and mutual funds centered on utilities, including the $18 billion Utilities Select Sector SPDR ETF, which has returned 21.77% year-to-date as of November 5, outperforming many other SPDR sector funds. Travis Miller, an energy and utilities strategist at Morningstar, noted:
“Utilities have rebounded sharply since their October 2023 low as the market began anticipating a shift toward lower interest rates and an increase in US energy demand. AI data centers and manufacturing growth represent the biggest sources of potential energy demand growth for utilities in decades.”
Expanding on that, Mckinsey states that the rapid adoption of digitalization and AI has sharply increased the demand for data centers in the United States. To match the current pace of adoption, data center power needs are expected to grow to roughly three times today’s capacity by 2030, rising from 3–4% of total U.S. power demand to about 11–12%. Meeting this demand will require a significant increase in electricity production, marking an unprecedented shift in the U.S., where overall power demand has been mostly flat since 2007. Data center load could represent 30–40% of all net new demand through 2030, alongside growing needs from domestic manufacturing, electric vehicles, and electrolyzers. From 2024 to 2030, electricity demand from data centers alone is projected to rise by approximately 400 terawatt-hours, with a compound annual growth rate of about 23%.
The Federal Reserve’s recent 0.5% rate cut, or 50 basis points, is anticipated to provide a boost to renewable energy developers and project sponsors. According to Mona Dajani, partner and global co-chair of energy, infrastructure, and hydrogen at law firm Baker Botts, the start of a rate-cutting cycle “will jumpstart projects.” She noted the following about renewable initiatives:
“They’re very sensitive to the cost of capital, particularly for capital-intensive technologies like offshore wind, clean hydrogen, carbon capture, and solar [plus] storage.”
Dajani further noted that the market expects the Fed to reduce rates by a total of 100 basis points by year-end, which “would support the growth of the domestic supply chain for clean energy, easing the financing and construction of new facilities for solar, batteries, EVs, and wind.”
Our Methodology
To create our list, we reviewed the stock holdings of the Utilities Select Sector SPDR ETF. We then selected the top 10 electric utility stocks according to the number of hedge funds holding positions in each. The list is ranked in ascending order of hedge fund interest, as of Q2 2024.
Why do we care about what hedge funds do? 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).
An aerial view of a large power substation, standing tall in a residential neighbourhood.
CMS Energy Corporation (NYSE:CMS)
Number of Hedge Fund Holders: 35
CMS Energy Corporation (NYSE:CMS), Michigan’s largest utility company, provides natural gas and electricity to 68% of the state’s residents through its main subsidiary, Consumers Energy.
On November 5, Jefferies initiated coverage of CMS Energy Corporation (NYSE:CMS) with a Buy rating and a $76 price target, indicating a potential total shareholder return of about 15%. Jefferies projects CMS Energy to achieve a 7.5% CAGR in earnings per share, exceeding the company’s guidance of the “high end” of 6-8%. The firm also expects a strong funds-from-operations (FFO) to debt ratio of 15%, underscoring CMS Energy’s solid financial position. Jefferies highlights the utility’s extensive Michigan footprint and infrastructure replacement needs as factors supporting a reliable, long-term investment outlook.
In the third quarter of 2024, CMS Energy Corporation (NYSE:CMS) posted strong financial results, with adjusted EPS rising to $2.47, a $0.41 increase year-over-year. The company reaffirmed its 2024 EPS guidance of $3.29 to $3.35 and introduced its 2025 EPS outlook at $3.52 to $3.58. Additionally, CMS announced plans to submit a 20-year renewable energy plan to support Michigan’s clean energy goals, and its CEO emphasized a $7 billion roadmap to enhance grid reliability as a unique advantage.
Overall CMS ranks 9th on our list of the best electric utility stocks to invest in. While we acknowledge the potential of CMS as an investment, our conviction lies in the belief that 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 CMS 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.