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 Duke Energy Corporation (NYSE:DUK) 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).
Aerial view of a power plant near a lake lit up at night, showing off the company’s expansive electricity generation capabilities.
Duke Energy Corporation (NYSE:DUK)
Forward P/E as of September 27: 18.17
Earnings Growth this year: 7.60%
Number of Hedge Fund Holders: 37
Duke Energy Corporation (NYSE:DUK) is a U.S.-based energy company operating through two primary segments: Electric Utilities and Infrastructure (EU&I) and Gas Utilities and Infrastructure (GU&I).
On September 26, BMO Capital maintained its Outperform rating for DUK with an unchanged price target of $126. The firm revised its third-quarter earnings estimate for the company to $1.68 per share, down from $1.94 in the same quarter last year. The year-over-year decline of $0.25 per share was primarily due to the timing of reversals related to agility initiatives, favorable weather conditions in Q3 2023, and costs associated with Hurricane Debby.
Looking ahead, BMO Capital raised its fourth-quarter 2024 earnings estimate for Duke Energy Corporation (NYSE:DUK) to $1.73 per share, up from $1.51 in Q4 2023. This adjustment reflects anticipated normalized weather conditions, increased contributions from the Gas Utilities and Infrastructure segment, annualized rate relief, and higher interest expenses. The firm also increased its full-year 2024 earnings estimate to $6.03 per share, up from the previous estimate of $5.97.
Additionally, Duke Energy Corporation (NYSE:DUK) managed to secure a $57 million grant from the U.S. Department of Energy to rebuild a critical power line in North Carolina, a project expected to enhance grid reliability and create approximately 550 jobs. The company also issued $1 billion in junior subordinated debentures as part of its capital management strategy.
As of the second quarter of 2024, 37 hedge funds held bullish positions in Duke Energy Corporation (NYSE:DUK), down from 34 in the previous quarter, according to Insider Monkey. Among them, Adage Capital Management, led by Phill Gross and Robert Atchinson, held a significant stake, with 1.06 million shares valued at over $106.7 million.
Overall, DUK ranks 3rd on our list of Cheap Utility Stocks to Buy According to Hedge Funds. While we acknowledge the potential of DUK 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 DUK 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.
