Ticker Reports for September 15th
Powering Your Portfolio: The Utility Sector's Electrifying Surge
The utility sector is typically known for its steady but unspectacular performance, but it has shocked the market with an electrifying surge in 2024. Despite its defensive nature, the sector has climbed over 20% year-to-date, outpacing the broader market and defying expectations. This remarkable performance has caught the attention of investors seeking income and growth potential in a dynamic market environment.
Understanding the Utility Landscape
Utility companies form the backbone of modern society, providing essential services like electricity, gas, and water. These companies operate in a highly regulated environment, with government agencies overseeing pricing and ensuring a fair return for the utility while protecting consumer interests. This regulated framework, combined with their often monopolistic positions in their service areas, ensures stable demand regardless of economic fluctuations. This stability translates into predictable revenue streams and allows utilities to consistently distribute dividends to shareholders, making them attractive to income-focused investors.
Historically, the utility sector has performed well during periods of economic uncertainty, acting as a safe haven for investors seeking refuge from market volatility. However, in periods of strong economic growth, the sector's performance has often lagged behind the broader market, as investors tend to favor growth-oriented sectors with higher potential for capital appreciation. The recent 2024 surge suggests a potential shift in this dynamic, driven by changing interest rates and increased infrastructure spending, which are reshaping the utility landscape and attracting renewed investor interest.
Unveiling the Drivers of the Surge
Several key factors have propelled the utility sector's impressive performance in 2024. One significant driver is the changing interest rate environment. As the Federal Reserve signals a potential shift towards lower interest rates, utility stocks become increasingly attractive to income-seeking investors. Lower interest rates reduce the cost of borrowing for utility companies, enabling them to invest more in infrastructure projects and potentially increase dividend payouts, making their stocks more appealing compared to lower-yielding bonds. With lower bond yields, utility companies' relatively high dividend yields become increasingly competitive, drawing in investors seeking stable income streams.
Another catalyst is the influx of federal infrastructure spending. The Bipartisan Infrastructure Law passed in 2021, has allocated an estimated $1.2 trillion towards modernizing the nation's infrastructure, including a significant portion dedicated to the energy sector. This investment provides a substantial tailwind for utility companies, supporting their efforts to upgrade aging infrastructure, enhance grid reliability, and expand into renewable energy sources.
Furthermore, the growing demand for electricity is fueling the sector's growth. Driven by the rise of cloud computing and artificial intelligence, data centers are consuming increasing amounts of power, with their electricity consumption projected to grow significantly in the coming years. The burgeoning electric vehicle (EV) market is also placing greater strain on the grid, requiring utilities to expand their capacity and enhance their infrastructure to accommodate the anticipated surge in EV adoption.
Spotlight on Top Utility Stocks:
Three utility stocks stand out as compelling investment opportunities based on a combination of factors, including dividend yield, earnings growth potential, financial stability, and alignment with future industry trends.
NextEra Energy: Stability, Growth, and a Dual-Engine Approach
NextEra Energy (NYSE: NEE) is the world's largest utility provider by market capitalization, and the company operates on a dual business model. This dual business model encompasses a regulated utility (Florida Power & Light) and a leading renewable energy company (NextEra Energy Resources). NextEra has consistently invested heavily in renewable energy infrastructure, making it a global wind and solar power generation leader.
Its strong historical performance and leadership position in the rapidly growing renewable energy market make it a compelling choice for investors seeking income and growth. Its current dividend yield of 2.57% provides a steady income stream, while its expansion into wind and solar energy positions it for future growth as the clean energy transition accelerates.
Vistra Energy: High Growth with a Nuclear Focus
Vistra Energy (NYSE: VST) has emerged as a top performer in 2024, with its stock price surging by 109% year-to-date. This remarkable performance is fueled by the resurgence of interest in nuclear power, a key component of Vistra Energy's diverse power generation portfolio.
The company's recent acquisition of Energy Harbor further strengthens its position in the nuclear energy market and expands its customer base.
While its current dividend yield of 1.08% is relatively low compared to other utility stocks, its strong growth prospects make it an attractive option for investors focused on capital appreciation.
Xcel Energy: Investing for the Future, Delivering Value Today
Xcel Energy (NASDAQ: XEL) is a regulated electric and gas utility that operates across eight Western and Midwestern states. Xcel Energy offers an attractive combination of value and income, trading at a lower price-to-earnings (P/E) ratio than many of its peers, potentially reflecting investor perception of slower growth compared to some of its faster-growing counterparts. However, this lower valuation may present an opportunity for investors who believe in Xcel Energy’s long-term growth prospects.
The company boasts a higher-than-average dividend yield of 3.43% and has a strong track record of dividend growth, increasing its payout for 21 consecutive years. Xcel Energy’s robust capital investment strategy is focused on infrastructure upgrades and expanding its renewable energy portfolio, positioning it for continued growth in the years to come.
Diversifying With a Utility ETF
The Utilities Select Sector SPDR Fund (NYSEARCA: XLU) provides a compelling option for investors seeking broad exposure to the utility sector while minimizing risk. This ETF tracks the utility sector of the S&P 500, offering instant diversification across a range of leading utility companies. By investing in XLU, investors can reduce their exposure to the risks associated with individual utility stocks while gaining exposure to a broader representation of industry trends and performance drivers.
XLU's low expense ratio of just 0.09% makes it a cost-effective way to invest in the sector, and its historical performance has generally been solid, with the ETF’s price up 22% year to date. This makes XLU a popular choice for investors seeking a simple and effective way to participate in the utility sector's growth.
Investing in the Utility Sector's Bright Future
The utility sector's 2024 surge demonstrates its potential to deliver income and growth, defying its traditional image as a slow-growth sector. Driven by favorable interest rates, increased infrastructure spending, and rising power demand, utility companies are poised to play a pivotal role in the ongoing energy transition.
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Adobe Stock Builds Long-Term Value: Consider Buying on the Dip
Investors needn’t worry about Adobe’s (NASDAQ: ADBE) near-term price action because of the longer-term value gains derived from its quality. Adobe investors should instead focus on the bullish longer-term price action. The chart of monthly prices shows this leading SaaS provider that monetizes AI today is in a solid uptrend. The uptrend is marked by high volatility in 2020-2022, resulting from the pandemic bubble and then again over the past eighteen months driven by the AI bubble. Still, it is an uptrend winding up within a narrowing consolidation range, preparing to retest the top of the range and likely break to new highs, only not soon. It will probably be sometime in early to mid-2025.
The long-term action is biased toward the upside because of rising support levels, support above the consolidation range’s mid-point, and bullish signals in the stochastic and MACD that suggest an additional upside is coming. The question is how high Adobe can build its wall of worry, and the answer is significantly higher, but investors should be wary of volatility. The Q3 results were uninspiring and may result in a retest of support levels before the price action moves up to retest for resistance at the top of the range.
Adobe Falls on Tepid Guidance: Pay Attention to the Cash Flow
Adobe had a solid quarter but failed to inspire with its guidance. The $5.41 billion in net revenue is up 11% compared to last year, outpacing the consensus estimate by 70 basis points on strength in all its operating divisions. Digital media, including Creative Cloud and Document Cloud, grew by 11%, with a 10% increase in creative and an 18% increase in document. Digital Experience also grew by 10%, and another year of low double-digit gains is expected systemwide in 2025.
The problem for the price action following the Q3 release is the guidance for Q4. The guidance is tepid relative to analysts' consensus, as reported by MarketBeat, and shows a sequential slowing in the business. The salient point is that Adobe continues to grow despite its large size; it is the leading digital experience creation platform today and generates robust cash flow. Cash flow in Q3 topped $2 billion or 37% of revenue and allowed for significant value building regarding the balance sheet and shareholders.
Adobe’s earnings power is solid, driving a substantial capital return program consisting entirely of share repurchases. The buybacks in Q3 reduced the count by 6.9% on average and will likely continue at a robust pace for the foreseeable future. The balance sheet highlights include decreased assets and increased liability, resulting in a decline in shareholder equity, but the increase in treasury shares more than offsets the loss. The takeaway is that Adobe’s balance sheet hints at burnt value, but its value burned in favor of shareholders, which will help support the stock’s uptrend over time.
Adobe Stock Is Priced to Perfection
The analyst activity following Adobe’s Q3 results is mixed but shows a deepening conviction the stock is priced to perfection. The half-dozen revisions released within the first day of the release include a downgrade to Neutral, three price target reductions offset by two price target increases, and a maintained target above consensus. The revisions amount to a consensus of $607 compared to the broader consensus of $606, suggesting Adobe stock may fall today but will likely rebound soon and continue to move sideways near current levels until something changes in the outlook.
Adobe’s price action fell more than 8% after the release and shows resistance near the top of the narrowing range, but it is still above critical support targets and more likely to move sideways than not.
Critical support is near $500 and may be retested before the year’s end, presenting an even more opportune entry point if it is reached. If not, investors should expect ADBE stock to drift sideways for the next few months to three quarters unless there are surprises in the forthcoming quarterly reports.
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Albemarle Jumps as Lithium Stock Buying Frenzy Takes Off
At any given time in the stock market, there are a couple of unknown and uncovered trends that could become one of the “I wish I bought” plays a few years later. Some people regret not buying into NVIDIA Co. (NASDAQ: NVDA) before it was NVIDIA; others wish they had bought Carvana Co. (NYSE: CVNA) before the stock rallied over ten times on a corporate restructuring.
Today, most people understand that the most popular alternatives to fossil fuel energy are now split between solar and electric vehicles (EVs). Knowing that most of the energy sector’s interest will be headed into these niches, and likely the billions of investment capital to create the necessary infrastructure, investors could dig deeper into the implications for solar and EV sources.
One relies on materials like polysilicon for chip and solar panel making. In contrast, EVs depended heavily on one commodity that has recently experienced a price crash. Lithium prices are down to 2021 levels, which spells the potential bottom of the profit cycle for lithium stocks like Albemarle Co. (NYSE: ALB), as the company has gone on a recent 17% rally in a single week. Here’s why there’s so much interest in the company.
Albemarle's Profit Cycle Signals Massive Growth Potential Ahead
Investors need to realize that there are better ways to time a business's potential top and bottom than just the stock's price action. Albemarle's financials show just how much growth potential could be had in the coming quarters as the lithium market recovers.
Speaking to gross margins for Albemarle, pre-COVID levels showcased profitability of up to 36%, whereas today's gross margin stands at only 12.3%, showing a massive downswing and potential rebound in the future. Operating margins show the same trend, from 20.8% in 2018 to only 1.9% for 2023, another sign of a possible rebound ahead.
Knowing that this could be the potential bottom for Albemarle's business cycle, Wall Street analysts now forecast up to 353.6% earnings per share (EPS) growth for the next 12 months in the company. Leaning on these bullish factors stacking up for Albemarle stock, others on Wall Street made a bold prediction for the company's future.
Those at Evercore decided to place a price target of up to $170 a share for Albemarle stock as recently as late August 2024. The stock would need to rally by 93% from where it trades today to prove these analysts right.
Now that EV stocks like Tesla Inc. (NASDAQ: TSLA) and BYD (OTCMKTS: BYDDF) have recently shown a recovery in their sales and delivery cycles, the low levels of lithium production (due to low prices) might quickly shift to benefit margins at Albemarle and other lithium stocks on the new demand cycle.
China's deliveries and orders have increased by double-digits, indicating demand for Tesla EVs in the region. Based on these new trends, Albemarle stock has another trend to lean on and consider in the potential new bull cycle for the lithium industry.
Speaking of improving margins, China just announced that it will cut its monthly lithium production by 8%, a massive tailwind that could push lithium's price higher on tightening supply. As Albemarle is the world's largest lithium miner, this can spill over the company's financials and, therefore, its valuation.
Rising Bullish Signals Build Up for Albemarle Stock in the Market
As the bullish and optimistic evidence stacks up for Albemarle’s future, others in the market have no choice but to act on this new information. Investors can start by looking at the bearish side to determine whether interest is in taking this stock lower in the coming months.
Albemarle stock’s short interest declined by as much as 3.7% over the past month alone to show investors signs of bearish capitulation. More than that, up to $3.6 billion in institutional capital had made its way into the company over the past 12 months.
Primecap Management and ProShare Advisors are leading the institutional buying lately. These two Wall Street firms added 2.4% and 10.2% to their holdings in Albemarle stock as of August 2024, respectively. These new buyers brought their net investments up to $364.2 and $149.8 million, respectively, for 3.2% and 1.3% ownership in the company.
Even if the cycle takes a bit longer to arrive, investors can cushion any volatility that might hit the stock by enjoying a $1.62 per share payout or an annualized dividend yield of up to 1.8% today.
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