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The Zacks Analyst Blog Highlights California Water Service, TransAlta, American Water Works, NRG Energy and American Electric Power

For Immediate Release

Chicago, IL – May 14, 2024 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: California Water Service Group CWT, TransAlta TAC, American Water Works Co. AWK, NRG Energy Inc. NRG and American Electric Power Company Inc. AEP.

Here are highlights from Monday’s Analyst Blog:

5 Utility Stocks at the Forefront of the Recent Rally

The utility sector, which tends to outperform when the economy is in a downturn, staged a nice comeback, gaining 8.5% since the start of April. The solid returns have made it the top-performing S&P 500 sector of the second quarter and the third-best-performing sector year to date. The prospect of rate cuts this year, a slowing economy and solid industry fundamentals buoyed the rally.

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While many stocks have powered the sector, we have highlighted five that led the way higher in the past month and saw positive earnings estimate revision for the current fiscal year. Additionally, these stocks have a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold). These are California Water Service Group, TransAlta, American Water Works Co., NRG Energy Inc. and American Electric Power Company Inc.

Here, we discuss some strong reasons for the outperformance of the sector. These factors are likely to fuel the rally in the coming weeks as well:

Defensive Investment

Being a low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or safe haven amid economic or political turmoil.

The world's largest economy is showing signs of a slowdown, thus raising bets for defensive investments. The economy added a lower than expected 175,000 jobs last month, and the unemployment rate unexpectedly jumped to 3.9%. After growing for 15 consecutive months, U.S. service sector activity also unexpectedly contracted in April. In another recent weak data, consumer confidence dropped last month to the lowest since mid-2022. Additionally, the United States had a weak start to the year due to lower consumer and government spending amid growing inflation. The economy expanded at the slowest pace in two years, with GDP rising 1.6% annually in the first quarter.

Fed “No Rate Hike” Memo

Being interest rate-sensitive, utility stocks got a boost from the Fed’s message. The Fed signaled that its fight against inflation will continue for a longer period, setting the stage for a period of extended higher rates but no rate hikes. In its latest meeting, the Fed kept interest rates steady at a 23-year high in the range of 5.25% to 5.5%, citing a “lack of further progress” on inflation. Powell reiterated that it will now take longer than expected for the Fed to reach the confidence that inflation is moving sustainably down to 2%.

As utilities require huge infrastructure, which creates a massive debt burden and interest obligation, the Fed’s “no rate hike” memo lifted the space.

Solid Industry Fundamentals

The sector is among the beneficiaries of the artificial intelligence (AI) craze and a boom in data center growth that will likely boost electricity demand for companies within the utilities sector. Additionally, the re-shoring of manufacturing, which requires more power for battery plants and chipmaking factories, and the setting up of charging stations for electric vehicles are expected to drive a surge in energy demand. According to a Wells Fargo analyst, "power demand in the United States is actually growing for the first time in 15 years.”

Further, an ever-increasing population continues to push up demand for utility supplies like water, gas and electricity.

Best-Performing Stocks

California Water Service is one of the largest investor-owned water utilities in the United States. The stock has jumped 19.7% in a month and saw a solid earnings estimate revision of 90 cents for this year. It has an estimated earnings growth rate of 246.1%.

California Water Service has a Zacks Rank #1 currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

TransAlta is Canada's largest non-regulated electric generation and marketing company. It has risen 16.7% in a month and saw a solid earnings estimate revision of 22 cents for this year. TransAlta’s earnings are expected to decline 54.1%.

The stock has a Zacks Rank #3.

American Water is a water supply and wastewater service provider. It provides essential water services to more than 14 million customers in 24 states and acquires small water service providers to expand its customer base. The stock has gained 17% in a month and saw a positive earnings estimate revision of a couple of cents for this year.

At present, American Water has a Zacks Rank #3

NRG Energy is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial as well as commercial consumers in major competitive power markets in the United States. The stock has gained about 15% and has an estimated earnings growth of 26.4% for this year.

NRG Energy saw a solid earnings estimate revision of 10 cents over the past 30 days for this year and has a Zacks Rank #3.

American Electric is a public utility holding company, which, through directly and indirectly owned subsidiaries, generates, transmits and distributes electricity, natural gas and other commodities. The stock has risen 13.2% in a month and saw a positive earnings estimate revision of 3 cents for this year.

AEP is expected to post an earnings growth of 6.1% for this year. It has a Zacks Rank #3.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.

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NRG Energy, Inc. (NRG) : Free Stock Analysis Report

American Electric Power Company, Inc. (AEP) : Free Stock Analysis Report

TransAlta Corporation (TAC) : Free Stock Analysis Report

American Water Works Company, Inc. (AWK) : Free Stock Analysis Report

California Water Service Group (CWT) : Free Stock Analysis Report

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