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 Vistra Corp (NYSE:VST) 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).
Solar panel workers installing a new farm for clean energy generation.
Vistra Corp (NYSE:VST)
Number of Hedge Fund Holders: 92
Vistra Corp (NYSE:VST), a Texas-based, vertically integrated energy company, operates a diverse portfolio that includes electricity generation, wholesale energy sales, fuel production, and logistics. Vistra Corp (NYSE:VST) provides electricity and natural gas to residential, commercial, and industrial clients.
Amid rising clean energy demand, especially from sectors like AI and data centers, Vistra Corp (NYSE:VST) is well-positioned to benefit. Back in March, the company completed its acquisition of Energy Harbor, enhancing its nuclear capacity by an additional 4,000 megawatts and expanding its customer base by around 1 million. Vistra Corp (NYSE:VST) is also investing significantly in renewable energy, with active projects in solar and battery storage. In May, the company announced plans to add up to 2,000 MW of natural gas capacity in Texas, aimed at improving grid stability as demand increases with economic growth and sectoral electrification.
JPMorgan initiated coverage on Vistra Corp (NYSE:VST) on October 17, assigning an Overweight rating and a price target of $178. The firm emphasized Vistra’s strong positioning within the Texas power market, suggesting that it could benefit from natural gas production growth and energy market volatility. With nearly half of its gas generation operating in the ERCOT market, Vistra Corp (NYSE:VST) stands to profit from intra-day price surges driven by factors such as heat waves and evening power demands.
Here’s what Fidelity Investments said about Vistra Corp. (NYSE:VST) in its Q2 2024 investor letter:
“An overweight stake in utility company Vistra Corp. (NYSE:VST) (+24%) was the top individual relative contributor. In Q1, the Texas-based independent power producer completed its acquisition of Ohio-based nuclear fleet operator Energy Harbor. The new Vistra, with its expanded geographic footprint, is in strong position to gain from the buildout of AI-capable data centers, which require enormous amounts of power to run. It is expected that local grids in the U.S. will need to invest heavily over the coming years to improve their power infrastructure and meet growing demand. In the nearer term, firms may choose to contract with independent power producers, like Vistra, rather than rely on the local provider.”
Overall VST ranks 1st on our list of the best electric utility stocks to invest in. While we acknowledge the potential of VST 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 VST 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.