Utility Stocks have traditionally been the safe haven in an economic downturn with dependable free cash flow generation that covers a generous dividend income to investors.
The Wall Street Transcript has recently interviewed several award winning investment professionals in our exclusive network. These are some of their current top picks from which investors can begin to build a portfolio of utility stocks.
In a 5,174 word interview, exclusive to the Wall Street Transcript, John Ullman and his team of professionals detail their investment philosophy and several of their recent top picks among utility stocks.
John G. Ullman is President and Founder of John G. Ullman & Associates, Inc. Earlier, he was President of USGM Securities, Inc., and at Corning Inc., he worked in financial management.
He received a bachelor’s degree in economics from Johns Hopkins University. He received an MBA from the University of Chicago, with a focus in financial management.
“Our investment methodology is buying securities based upon our determination of good value.
While there are certainly growth stocks in the portfolios, we use fundamental analysis to try to find stocks that we see as undervalued, in sectors that we very much like.
At this point, we are interested in health care, infrastructure, technology, with some of these technology stocks being ones that are in fields that we like.
However, some of the firms have been somewhat out of favor, so the valuations are much lower.
An area that over the years has worked very well for us is value-based stocks, with a mathematical process tied to their underlying values.
We also have foreign holdings in particular countries. Right now, that is very low, but in the reasonably near future we would like to look at adding back into some of the developing countries.”
Mark Abdalla, CFA, works for John Ullmann as a Senior Equity Research Analyst at John G. Ullman & Associates.
Previously, he worked at Strategic Financial Services, Manning & Napier, and BNP Paribas.
A graduate of Carnegie Mellon University, he received a master’s degree in economics from Boston University and an MBA from Cornell University.
“One specific company within the Utility sector that we like and own shares of is Dominion Energy (NYSE:D).
The utility company sold off its midstream assets in 2020 for $8.7 billion, and it also cut its dividends.
It did a little restructuring.
The stock sold off at the time.
Generally, investors do not like it when dividends are cut.
The midstream assets were sold to Warren Buffett. It was seen as if Warren Buffett was getting a good deal in terms of value for the assets, but we liked the long-term strategic thinking of management at the time.
We also liked the valuation of the stock price, it having sold off because of these moves.
And with that, we increased our position in Dominion Energy.
One of the strategic initiatives that Dominion’s management is taking is investing heavily in the renewable energy sector.
Management plans to spend $37 billion in renewable energy growth capex, so that is capital expenditure in renewable energy projects that will be in offshore wind.
The company plans to spend heavily in the offshore wind sector right off the coast of Virginia, in addition to onshore wind and solar farms.
These initiatives are supported by tax credits, and the company is protected by semi-automatic rate increases. Therefore, we feel that this utility company is favorable in terms of a risk/reward scenario that would take place.
In addition, we think the downside is fairly limited, while the company can grow along with these initiatives.
One other reason why we see the Renewable Energy sector to be favorable is that it is being supported at the state level.
States are now mandating certain renewable energy goals to meet their climate change endeavors. We view climate change as a long-term problem, and some of these solutions are being tackled by the utility companies themselves.
So, many renewable energy stocks are priced very, very high.
We stay away from those. But we found utilities such as Dominion Energy to be a safer way to invest in the renewable energy sector, given the reasonable valuation.
The price of oil and natural gas is high right now; that is another reason to invest in renewable energy, given that it is an alternative source of energy.
But that said, the price of oil and natural gas can come down. It is very volatile, and it is really determined by geopolitical factors, in addition to overall supply/demand.
While climate change is a long-term problem, we see utility companies with their resources being a major player in tackling that problem.
So overall, we like their management’s strategic thinking, their plans, their investments, in addition to the valuation of the stock.”
Timothy Winter, CFA, is a portfolio manager of The Gabelli Utilities Fund, The Gabelli Utilities Trust, The Gabelli Global Utility & Income Trust, and the Love Our People and Planet ETF and a research analyst covering the utilities industry for GAMCO Investors, Inc.
He joined the firm in 2009 and has over 25 years of industry experience.
Previously he served over 15 years as research analyst covering utilities at AG Edwards, as well as Jesup & Lamont and SM Research. Mr. Winter has received numerous awards and recognition for his work in the industry.
He was a three-time All-Star Wall Street Journal winner and five time ranked number-one Electric Utility Team by Institutional Investor.
In 2018 he received Thomson Reuter’s U.S. Analyst Award and was ranked the number-one stock picker in the electric utility sector and water utility sector and number two in the gas utility sector.
Mr. Winter holds a B.A. in economics from Rollins College and an MBA in finance from Notre Dame. He is a CFA charterholder.
His 2,253 word interview in the Wall Street Transcript reveals his top utility stocks.
“The first name to highlight is NextEra Energy (NYSE:NEE).
They are the biggest electric utility in the world: $150 billion of equity cap, $210 billion of enterprise value.
They are also by far the leading and largest renewable energy developer in the world, and specifically, they’re focused on North America. And 60% of their earnings do come from regulated business in Florida, Florida Power & Light, which benefits from customer growth and solid regulation and a healthy rate plan for the next four years.
NEE management outlined the tremendous opportunity and capital needs for U.S. decarbonization and clean energy by 2050.
The numbers are staggering.
Currently, the U.S. has 1,100 gigawatts of power generation including coal and nuclear, natural gas, wind, solar and hydro.
The U.S. needs 7,000 gigawatts of renewable energy to decarbonize the U.S. economy by 2050, including 3,500 gigawatts from the power sector.
And so, as they’re the leading developer of wind, solar and battery storage, and they’re also investing in hydrogen, NEE is hands down the leading player with 50% market share of wind development and going to participate in this huge megatrend.
So that’s the number-one company.
NEE also owns 58% of NextEra Energy Partners (NYSE:NEP) which is also a renewable company.
They own wind, solar and some natural gas pipelines that are unique from NextEra Energy.
And it’s a dividend play.
NEP grows the dividend 12% to 15% per year and acquires renewable projects from NextEra Energy and/or from other entities, or develops its own renewable projects.
So those would be the one and two on my list for sure.”
One step up from these utility stocks are the copmanies that supply utilities with the components to generate power for the people.
Benjamin Nolan, CFA, is a Managing Director in the Transportation sector, covering Shipping and Energy Infrastructure at Stifel Financial Corp.
Mr. Nolan joined the firm in 2013. Before joining Stifel, he covered both equity and debt of companies in the maritime sector at Knight Capital.
He also spent six years at Jefferies as an Equity Research Analyst covering the shipping sector and spent several years as a corporate Financial Analyst for EOG Resources in the oil and gas business.
He received a BBA degree in finance from Texas A&M University and an MBA from the University of Houston.
Mr. Nolan has won numerous StarMine and Institutional Investor awards for stock picking, earning estimating, and research analysis.
In this 3,081 word interview, from February of 2022, and exclusively in the Wall Street Transcript for our subscribers, Benjamin Nolan explained how the utility stocks are dependent on the supply of LNG.
“So we started maybe two years ago with COVID. Initially, there was a downward pressure in demand.
And then, so was LNG demand.
The price got really low in 2020, to the point that a number of the U.S. export facilities actually shut in some of their capacity for several months, because there was no economic incentive to produce and export the LNG.
That changed pretty dramatically starting maybe a little over a year ago.
Demand began to recover pretty quickly in a lot of places around the world.
That was first seen in Asia.
And then, as a consequence of that, all of the U.S. production came back to being fully online.
And in fact, in some respects, it overcorrected.
So there was starting last summer, much more demand for natural gas, and there was the ability to produce and export that was in part due to a few outages in places like Australia or Norway, but in general, underlying demand was just extremely robust.
The price of LNG internationally went up 10-fold, 12-fold from the trough of 2020, when it was $3, $4.
We saw prices in Europe and Asia just a few months ago over $40. It’s come off a little bit since then, but it is still extremely strong.
The other big factor that has been in play lately is Europe. Europe has seen a relatively strong level of demand.
It’s a function of coal-fired power generation closing down, nuclear power generation closing down.
At the same time, there’s been disruption of gas flows coming from Russia and a relatively healthy level of demand.
And that has been unable to be met by renewables, which was the original hope. And it could get worse if something terrible were to happen with Russia and Ukraine.
So, at the moment, everybody wants LNG.
And the problem is that these export projects take many years to develop and produce.
So you can’t just decide that you want more. It won’t happen overnight.
The good news is that there are a number of projects that are being constructed now.
In fact, one in the U.S. in Louisiana just came on stream and is shipping its first cargo as we speak.
But again, it’s going to be a slow growth process for incremental LNG.
So I think, as we look out today, prices are high. It doesn’t seem as though there’s any real reason that they should be falling back, at least anywhere in the next year or two.”
The development of the LNG market globally leads Ben Nolan to an interesting company dependent on the utility stocks.
“The other important part of it is — and really what we’re talking about primarily here is for power generation — you do have a lot of developing economies, various places around the world — India, Pakistan, Bangladesh, even China — where their power consumption is going up a lot.
They’ve got to figure out how they’re going to meet those demands and the cleanest and, generally, one of the cheapest methods of being able to do that is with natural gas.
Now, it’s not carbon free.
So perhaps you could argue that it’s just a bridge fuel, but if it is a bridge fuel, it’s a multi-decade bridge fuel.
And then, point number two is that there are a lot of places around the world where we know natural gas exists and there’s not really a strong domestic use for it, or at least it’s not enough to use all that’s available.
And so it’s simply a function of resources being available, but not where they’re needed.
And so, that’s what LNG is all about.
Taking that natural gas, condensing it down to a size that makes economic sense to transport it when you refrigerate it and get it cold enough to be a liquid — it condenses down to 1/600th of its size.
And then you can move it and power the world.
The challenge is, it’s really expensive to get something negative 260 degrees. So that’s a challenge. Again, it takes some time.
It’s pretty expensive to do.
But if you’re doing it in scale, then there’s both the resource and the demand.
So LNG is, you might argue, a sort of an old energy, not perfectly clean source of fuel, but it is cleaner, and I think almost definitively is very much still a growth business.”
The development of the LNG market globally leads Ben Nolan to an interesting company dependent on the utility stocks.
“…the other aspect of LNG that makes all of this work is transportation.
So that means ships.
There are a decent number of those on order. Longer term, there’s going to be the need for more, and growth in that category, but that’s going to be a little bit more of a cyclical play.
Ships can be built or removed or the distance that a ship needs to travel can vary.
And so, a little less of a structural investment, a little bit more of a trading play.
I also think that some of the people who produce the equipment that is used for LNG have some nice tailwinds behind them.
The one that I would call out there is Chart Industries (NASDAQ:GTLS), that makes the equipment that liquefies it, that turns it from a liquid back into a gas, that puts the tanks that would go on trucks on trucks.
And so I think as the volume increases and it’s produced and consumed and everything else, there are the sort of picks-and-shovels type players that would really stand to benefit. Chart is the one I would call out there.”
This stock pick is up about 50% from Mr. Nolan’s recommendation and is one example of how even a safe haven sector like utility stocks can often perform as well as many riskier portfolios.
Benjamin Nolan, CFA, Managing Director & Research Analyst, Stifel Financial
Timothy Winter, CFA, Portfolio Manager, GAMCO Investors, Inc.
Mark Abdalla, CFA, Senior Equity Research Analyst
John G. Ullman, President & Founder
John G. Ullman & Associates, Inc.