More than three times as many of the utility companies I follow raised and/or beat management guidance when they released Q4 results, as cut or missed. Even more electric, gas, water, and communications utilities expanded their investment plans — the primary fuel for reliable earnings and dividend growth, observes Roger Conrad, editor of Conrad’s Utility Investor.
Utility stocks are also great candidates to win from portfolio rebalancing, being historically underweighted at just 2% of the S&P 500 Index (^SPX) and the myriad related ETFs. And though the fog of war in the Middle East has again obscured the inflation picture, there have been signs that borrowing costs may be headed lower.
State Street Utilities Select Sector SPDR ETF (XLU)
Those are three strong reasons for utility stocks to move higher this year. In fact, some are still priced to deliver windfall gains. On the other hand, a good many have surged into uncharted territory for share prices and valuations. And they’re arguably vulnerable to any cooling of AI hype.
Supplying electricity to AI-enabled data centers is the primary reason so many power companies raised guidance the past few weeks. That spending is underpinned by long-term contracts with extremely well-capitalized Big Tech companies. Even if the actual demand doesn’t materialize, utilities will still get paid. And the new generation and transmission they’re building now will be fully financed and available to service other customers.
But while an AI bust should not be a critical threat to utilities’ earnings and balance sheets, it would almost certainly erase sector stocks’ recent windfall gains. And that’s why it’s so critical for investors to do a little harvesting.
You’ll be selling high. But by redeploying some of the cash into stocks that haven’t yet fully shared in the rally, you’ll be set up for future gains, no matter how long the AI boom lasts.
