We recently published a list of 10 Most Undervalued Utility Stocks to Invest in Now. In this article, we are going to take a look at where American Electric Power Company, Inc. (NASDAQ:AEP) stands against other most undervalued utility stocks to invest in now.
EY believes that utilities are required to balance growing energy demands, decarbonization goals and customer satisfaction while, at the same time, navigating regulatory and financial challenges. Therefore, creative funding and strategic partnerships remain critical to financing ambitious energy projects amid elevated capital costs. Modernization of infrastructure can lead to a sustainable and resilient energy future, supporting providers and consumers.
Favourable Outlook for US Utilities Sector
As per Morningstar, one of the critical shifts in the US utilities sector is the strong growth of renewable energy sources. Over the past decade, declining costs for wind and solar projects and state-mandated renewable energy targets resulted in strong investments in clean energy. Utilities are required to innovate and invest in smart-grid technologies and battery storage in a bid to accommodate the growing influx of renewable energy. Such advances are expected to ensure grid reliability and efficiency with an increase in renewable energy’s share of the generation mix.
One of the critical components of the moats in the utilities sector is the regulatory framework in which they operate, says Morningstar. The requirement for regulatory approval and oversight to set customer rates tends to limit competition, but it also restricts utilities’ earnings. The regulatory environment ensures their ability to operate with predictable cash flows. The next aspect is the requirement for large capital investment. Building and maintaining the infrastructure required for electricity, gas, and water distribution requires significant capital, with regulators limiting the returns utilities can generate on such investments. Therefore, rate regulation and the requirement of reliable and consistent energy supply result in stable demand and predictable revenues, attracting investors who want low-risk and steady returns.
READ ALSO: 7 Best Stocks to Buy For Long-Term and 8 Cheap Jim Cramer Stocks to Invest In.
Electricity Demand to Revive
Historically, the US electricity demand has reflected the economic growth, averaging ~2% annually, says Morningstar. That being said, since 2000, this relationship continued to weaken because of improvements in energy efficiency and lower industrial electricity use. As a result, electricity demand has remained flat since 2007. However, the firm believes that revival seems to be on the cards. Several factors are expected to fuel renewed growth in electricity demand.
These include the proliferation of EVs, diminishing returns on energy-efficiency advancements, and surge of data centers because of advancements in AI. The utility companies are required to prepare themselves for higher demand by making investments in grid capacity and reliability. They can also make alliances with EV manufacturers and charging network providers so that they can capitalize on the dynamic EV market, added Morningstar.
Our Methodology
To list the 10 Most Undervalued Utility Stocks to Invest in Now, we used a screener to shortlist companies catering to the broader utilities sector. Next, we filtered out the stocks that trade at a forward P/E of less than ~20x. We also mentioned hedge fund sentiments around each stock, as of Q4 2024. Finally, the stocks were arranged in ascending order of their hedge fund sentiments.
Why are we interested in 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 373.4% since May 2014, beating its benchmark by 218 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 on March 4: ~17.7x
Number of Hedge Fund Holders: 47
American Electric Power Company, Inc. (NASDAQ:AEP) is engaged in the generation, transmission, and distribution of electricity for sale to retail and wholesale customers. The company’s commitment to decarbonizing its generation fleet remains in line with the broader industry trends and regulatory pressures to reduce the carbon emissions. This strategic emphasis is expected to yield numerous benefits for the company. With states and the federal government pushing for cleaner energy, American Electric Power Company, Inc. (NASDAQ:AEP)’s proactive approach to decarbonization is expected to lead to more favorable regulatory treatment and support for investment plans.
The company expects 8%-9% annual total retail load growth from 2025-2027 and ultimately anticipates serving over 20 gigawatts of new load by the decade’s end. American Electric Power Company, Inc. (NASDAQ:AEP)’s $54 billion, 5-year capital plan continues to support this opportunity as it builds infrastructure catering to the needs of its customers, communities and the states. Additionally, the company is evaluating $10 billion of potential incremental investment throughout its service territory and regional transmission grids. Therefore, the growth of the utilities sector, driven by grid modernization and higher energy demand, is anticipated to fuel growth for American Electric Power Company, Inc. (NASDAQ:AEP) as it invests in renewable projects and transmission infrastructure.
Overall, AEP ranks 6th on our list of most undervalued utility stocks to invest in now. While we acknowledge the potential of AEP as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for a deeply undervalued 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.