Top strategist reveals undervalued utility stocks to buy now

Utilities stocks have experienced significant growth in 2024, largely driven by the increasing demand for power due to the artificial intelligence boom. The Vanguard Utilities ETF has risen nearly 21% year-to-date, outperforming the S&P 500's 18% increase. However, Morningstar's chief U.S. market strategist, Dave Sekera, has recently downgraded the utilities sector from an overweight to an underweight rating, indicating that the sector may have peaked. Sekera noted that the current trading prices of utility stocks reflect an 8% premium over Morningstar's fair value estimates. The surge in utility stocks is attributed to the rising power consumption of data centers, which are essential for AI workloads. These facilities require significantly more electricity than traditional computing setups, contributing to the heightened demand for utility services. Despite the impressive year-to-date performance, Sekera believes that investors looking to enter the utilities market may be too late to capitalize on the initial growth spurt. For those still interested in investing, Sekera identified two utility stocks that remain undervalued: Entergy Corporation and NiSource. Entergy is currently trading at a 6% discount to its fair value estimate and offers a 3.8% dividend yield, while NiSource is at a 7% discount with a 3.25% dividend yield. Sekera recommends these stocks as potential replacements for other utility positions that may be overvalued. In contrast, Southern Co and Dominion Energy are considered overvalued, trading at premiums of 23% and 18%, respectively. This analysis suggests a cautious approach for investors in the utilities sector, emphasizing the importance of evaluating stock valuations in the current market environment.