Powering Profits: Utility Stocks That Shine in Volatility

Key Points

• After a volatile week in the stock market, it has become clear to investors that utility stocks and bonds are what's considered safe in the near term.
• The Utility ETF has outperformed the S&P 500, with signs of more to come in the following months.
• Two stocks are worthy additions to portfolios looking for double-digit upside and capped downside risk.

The market leaves investors with plenty of hints when volatility spikes, and recently, after the technology sector’s shaky price action, it looks like the sentiment is clear. Not only that, but the tariffs being implemented by President Trump have created a volatile environment for the foreseeable future. Wall Street money managers have already chosen where to protect their gains and limit their downside from here.

Last week, amid all of these events, utility stocks led the way in terms of price action, with a couple of individual stocks making a worthy addition to portfolios at these prices. With this in mind, investors not only have the answers as to where their capital could be better treated but also the broader implications for the S&P 500 and NASDAQ 100 indexes.

Taking a look at the Utilities Select Sector SPDR Fund NYSEARCA: XLU is a great start, as its price action and diversification can provide investors with limited downside along with steady upside and dividend income, in other words, a fantastic risk-to-reward ratio. Drilling into this sector, names like NRG Energy Inc. NYSE: NRG and FirstEnergy Corp. NYSE: FE are some of the best setups in the industry moving forward.

Risks and Hedges in Utility Stocks

Whenever the market is subjected to volatility increases, two places usually see inflows as a result of the so-called “Flight to safety.” These are either dollars or bonds and during the recent spikes, it looks like the capital chose the iShares 20+ Year Treasury Bond ETF NASDAQ: TLT as their safety instead of dollars.

What this means is that, as the manufacturing sector starts to expand again after a 28-month contraction, domestic business activity (through lower bond yields) might follow. That being said, this is where utility stocks come into play.

For investors who see individual stock picking as a riskier venture, there is the utility sector ETF, which not only trades relatively close to its 52-week high to show resiliency but also offers shareholders a net quarterly payout of $2.06 per share. At today’s prices, this payment would translate into a 2.6% dividend yield to outpace economic inflation.

On a more specific note, this ETF has outperformed the broader S&P 500 by as much as 3% over the past month alone, signaling that recent volatility (and one that is likely to persist) definitely has a place for these defensive stocks for any investor’s portfolios.

NRG Energy Stock: An Institutional Pick Today

As the stock has successfully traded within 90% of its 52-week high in the past couple of weeks, the fundamental (and technical) tailwinds behind the sector have driven a few institutional buyers to come and increase their exposure to the stock.

Such as those from Los Angeles Capital Management, who decided to boost their NRG Energy stock holdings by 10.9% as of February 2025. This new allocation brought their net position to a high of $105.3 million in the company and gave investors another bullish factor to consider in the company’s outlook coming up.

But these buyers weren’t the only ones willing to admit that NRG Energy’s future looks bright. Short sellers and bears decided to back off recently, as seen in the 20.5% collapse in short interest for the stock over the past month alone. More than that, analysts at Evercore have also recently taken a bold view on NRG Energy stock.

As of January 2025, these analysts boosted the stock’s rating to outperform while also valuing it at a $126 price target. This valuation is not only a steep boost from their previously set $74 target but also calls for up to 22% upside from where it trades today.

FirstEnergy Stock’s Premium Remains

By trading at a price-to-earnings (P/E) ratio of up to 25.9x today, FirstEnergy stock calls for a steep premium compared to the rest of the electric services industry, and its average valuation is only 13.5x today. Some value investors will call this expensive, while seasoned traders will remind them that the market always pays a premium for the stock it believes will outperform shortly.

The premium would also explain why Allspring Global Investments Holdings was willing to boost its holdings in FirstEnergy stock by 2.4% as of late January 2025. While it may not seem much on a percentage basis, this allocation brought its net position to $371.9 million today or 1.6% ownership in the company.

Last but not least, these tailwinds (and stability) allow management to pay up to $1.7 per share via dividends. Even though the stock trades at 92% of its 52-week high, the upside is significant enough to give investors an annual 4.22% dividend yield with this name.