Utilities group materially undervalued, Wells Fargo says; Constellation Energy, Sempra top ideas

[Power lines and sunset landscape]
Gargolas/iStock via Getty Images

Utilities are materially undervalued following a perfect storm of tailwinds hitting the group that is "much more structural in nature than cyclical," Wells Fargo analysts said Tuesday, seeing the investor mindset continuing to shift toward viewing utilities as more growth oriented than yield oriented, as growth becomes more of an investment case/driver from a total return perspective.

"This is not a fad!" Wells Fargo analysts led by Shahriar Pourreza wrote, saying the old school thought that the utilities sector is a risk-off call or a yield call is no longer relevant - "the defensive characteristics for the group merely create a floor, limiting downside, while upside optionality fully remains on several thematics that should continue to interest a wide range of investors, including growth, value, infrastructure, plain vanilla generalists, etc."

The bottom line: Wells Fargo said it is supply and demand fundamentals that underpin the bank's bullish view on the sector, and the "growth is non-cyclical and represents a structural change that is the engine behind utility and IPP growth."

The bank added Constellation Energy (NASDAQ:CEG [https://seekingalpha.com/symbol/CEG]) to its Best Idea List for independent power producers, as the best way to play hyperscaler opportunities and resource adequacy trends, and Sempra (NYSE:SRE [https://seekingalpha.com/symbol/SRE]) to its Best Idea List for utilities, as buyers ahead of a key reset in February, especially given current valuation levels, with the stock still trading at a discount with top-quartile growth.

Initiated at Overweight: American Electric Power (AEP [https://seekingalpha.com/symbol/AEP]), Constellation (NASDAQ:CEG [https://seekingalpha.com/symbol/CEG]), Dominion Energy (D [https://seekingalpha.com/symbol/D]), DTE Energy (DTE [https://seekingalpha.com/symbol/DTE]), Entergy (ETR [https://seekingalpha.com/symbol/ETR]), Eversource (ES [https://seekingalpha.com/symbol/ES]), Exelon (EXC [https://seekingalpha.com/symbol/EXC]), FirstEnergy (FE [https://seekingalpha.com/symbol/FE]), NextEra Energy (NEE [https://seekingalpha.com/symbol/NEE]), NiSource (NI [https://seekingalpha.com/symbol/NI]), NRG Energy (NRG [https://seekingalpha.com/symbol/NRG]), PG&E (PCG [https://seekingalpha.com/symbol/PCG]), (PPL (PPL [https://seekingalpha.com/symbol/PPL]), Sempra (NYSE:SRE [https://seekingalpha.com/symbol/SRE]), Talen Energy (TLN [https://seekingalpha.com/symbol/TLN]), Vistra (VST [https://seekingalpha.com/symbol/VST]), WEC Energy (WEC [https://seekingalpha.com/symbol/WEC])

Rated Equal Weight: Avista (AVA [https://seekingalpha.com/symbol/AVA]), CMS Energy (CMS [https://seekingalpha.com/symbol/CMS]), Con Edison (ED [https://seekingalpha.com/symbol/ED]), Duke Energy (DUK [https://seekingalpha.com/symbol/DUK]), Edison International (EIX [https://seekingalpha.com/symbol/EIX]), Evergy (EVRG [https://seekingalpha.com/symbol/EVRG]), IdaCorp (IDA [https://seekingalpha.com/symbol/IDA]), NorthWestern (NWE [https://seekingalpha.com/symbol/NWE]), OGE Energy (OGE [https://seekingalpha.com/symbol/OGE]), Pinnacle West (PNW [https://seekingalpha.com/symbol/PNW]), Portland General Electric (POR [https://seekingalpha.com/symbol/POR]), Public Service (PEG [https://seekingalpha.com/symbol/PEG]), Southern (SO [https://seekingalpha.com/symbol/SO]).

ETF: (NYSEARCA:XLU [https://seekingalpha.com/symbol/XLU]), (VPU [https://seekingalpha.com/symbol/VPU]), (IDU [https://seekingalpha.com/symbol/IDU]), (FUTY [https://seekingalpha.com/symbol/FUTY]), (RSPU [https://seekingalpha.com/symbol/RSPU]), (JXI [https://seekingalpha.com/symbol/JXI]), (FXU [https://seekingalpha.com/symbol/FXU]), (PUI [https://seekingalpha.com/symbol/PUI]), (PSCU [https://seekingalpha.com/symbol/PSCU]), (ELFY [https://seekingalpha.com/symbol/ELFY])

MORE ON CONSTELLATION ENERGY, SEMPRA, AND UTILITIES

* Constellation Energy: Long-Term Powerhouse, Wait For Potential Correction And Upcoming Opportunity [https://seekingalpha.com/article/4832313-constellation-energy-longterm-powerhouse-wait-for-potential-correction-and-upcoming-opportunity]
* Sempra: Strengthening Backbone Of U.S. Energy Infrastructure With $10 Billion LNG Infrastructure Deal [https://seekingalpha.com/article/4830730-sempra-strengthening-backbone-of-us-energy-infrastructure-with-10-billion-lng-infrastructure-deal]
* XLU: Cut Your Utility Investments [https://seekingalpha.com/article/4833449-xlu-cut-your-utility-investments]