We recently compiled a list of the 10 Best Utility Stocks to Buy Now. In this article, we are going to take a look at where Vistra Corp. (NYSE:VST) stands against the other utility stocks. You can also check out the 20 States With the Most Expensive Electricity In The US here.
The power and utilities industry in 2023 saw mixed outcomes. Despite a 53% year-on-year drop in natural gas prices for power generation, customer bills went up by 1.9%. This increase was due to record-breaking investments of nearly $171 billion in grid modernization and decarbonization efforts, along with rising interest rates. Overall, electricity sales dipped slightly by 1.2% year-on-year (YoY).
Looking ahead to 2024, the outlook for clean energy is bright. Forecasts predict stable electricity prices alongside a 2% growth in sales. This growth is fueled by a rise in clean energy investment, from both utility companies and the government. Investments are being directed towards renewable energy generation, with solar expected to double in capacity in 2024.
The U.S. Energy Information Administration (EIA) forecasts a significant year for solar power, with utilities planning a 30% increase in capacity by adding 31 gigawatts. Wind energy is also projected to grow by 5% or 7 gigawatts. As a result, solar and wind power are set to become the dominant sources of electricity generation in the US, potentially surpassing coal. Renewables are expected to reach 18% of total generation, while coal may fall to 17%, marking a historic milestone in the transition to cleaner energy sources.
Moreover, there is a forecast of accelerating demand for electricity in the US in the next few years. According to a report by consulting firm Grid Strategies, electricity demand forecasts for 2024 have been significantly revised upward based on filings submitted to the Federal Energy Regulatory Commission (FERC) in 2023. Grid planners now anticipate a nationwide increase of 4.7% over the next five years, which is a sharp rise from the 2.6% growth projected just last year. This rise in demand is expected to be accompanied by a substantial increase in peak demand, with forecasts indicating a growth of 38 gigawatts (GW) over the next five years.
This increase in electricity demand is driven by multiple factors. Industrial facilities, manufacturing plants, and data centers are experiencing a construction boom, with data centers in some areas like Virginia seeing unprecedented growth at 6% to 8% every year. Electric vehicles are also expected to contribute to the demand increase as BloombergNEF (BNEF) forecasts a 20% YoY increase in global battery electric and plug-in hybrid vehicle sales in 2024.
On the supply side, challenges remain. According to Senior Partner for Energy & Utilities at West Monroe, Danny Freeman, utilities are going to prioritize grid reliability and resilience in response to climate change. Extreme heat and drought are likely to continue disrupting power generation in 2024, with summer 2023’s record-breaking heat likely marking the start of a long-term trend.
The American West is facing its driest period in 1,200 years, and researchers predict a long-term pattern of aridification. These conditions can significantly reduce power output, especially during peak demand periods. Thus, the Department of Energy (DOE) awarded $3.5 billion in October 2023 to projects that will improve grid flexibility and resilience. The funding for this project is provided by the Grid Resilience Program (GRIP), created by the Infrastructure Investment Jobs Act (IIJA).
The rapid transformation of the utilities sector presents many exciting opportunities for investors. With this context in mind, let’s take a look at the 10 best utility stocks to buy now.
Our Methodology
To shortlist the best utility stocks, we relied on Insider Monkey’s database of 920 hedge funds as of Q1 2024 to analyze the hedge fund sentiment for each stock. We picked the utility stocks with the highest number of hedge fund investors. 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 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: 79
Vistra Corp. (NYSE:VST) is a retail electricity and power generation company that operates in different segments across the United States. The company serves over 5 million customers with a generation capacity of 41,000 megawatts and engages in various energy-related activities.
Vistra Corp. (NYSE:VST) reported strong Q1 2024 results, with EBITDA from ongoing operations increasing by $259 million compared to the same period in 2023, totaling $813 million. For the full year 2024, the company expects ongoing operations EBITDA to reach approximately $4.8 billion, excluding potential benefits from the nuclear production tax credit.
Vistra Corp. (NYSE:VST) also introduced operational performance improvement (OPI) initiatives aimed at achieving $200 million in annual cost savings collectively by the end of 2026. Analysts are bullish on Vistra Corp. (NYSE:VST) with a “Strong Buy” and a price target of $51.6, reflecting a potential upside of over 17% from the current price levels.
Here’s what Third Point Management said about Vistra Corp. (NYSE:VST) in its Q1 2024 investor letter:
“Vistra Corp. (NYSE:VST) is one of the largest independent power producers (“IPPs”) and retail electricity providers in the country. In 2023, Vistra’s natural gas, nuclear and coal plants generated over 20% of electricity consumed in Texas.
Unlike regulated utilities, where profits are determined by capital invested, Vistra operates in deregulated markets (primarily ERCOT and PJM), where they generate and sell electricity at market prices. Historically, Vistra has been valued at a steep discount to both the regulated utility sector and the broader market in part due to the challenging fundamentals of merchant power. Stagnant domestic electricity demand combined with an oversupply of natural gas has made US electricity prices among the lowest in the world. Meanwhile, significant growth in subsidized renewable generation has created major intraday price volatility in Vistra’s core markets, with power prices sometimes going negative during periods of abundant sunshine or wind. Bankruptcies, including Vistra’s former parent company TXU in 2014, have become commonplace in the sector over the last decade…” (Click here to read the full text)
Overall VST ranks 1st on our list of the best utility stocks to buy. You can visit 10 Best Utility Stocks to Buy Now to see the other utility stocks that are on hedge funds’ radar. 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.
