Power Surge: Utilities Sector Breaks out, Outperforms Market

Key Points

• The Utilities sector recently broke out of a multi-year downtrend, marking a significant momentum shift.
• Thanks to recent momentum, the Utilities Select Sector SPDR Fund (XLU) is now outperforming both the overall market (SPY) and the technology sector (XLK) year-to-date.
• GE Vernova (NYSE: GEV), NextEra Energy (NYSE: NEE), and Southern (NYSE: SO) are three standout utility stocks.

The utilities sector just broke out of its multi-year downtrend, confirming a significant change of character and shift in momentum. The sector, which has certainly taken a back seat to other sectors in recent years, like technology and in-play artificial intelligence stocks, is now firmly in the driving seat.

Now, this might surprise you. Not only has the popular ETF, the Utilities Select Sector SPDR Fund NYSE: XLU, outperformed the overall market, SPY, but it has also beaten the technology sector’s performance year-to-date. After its impressive surge of almost 10% this month, the XLU is now up 12.5% YTD, the overall market is up just below 10%, and the popular technology sector ETF, the XLK, is up just 6.7%.

So, will the utilities sector's surprising and standout outperformance continue? Let’s take a closer look at the overall sector and three stocks within it that have outperformed on the year. 

Analysing the Utilities Sector

The XLU ETF aims to track the price and yield performance of the S&P 500 Index's Utilities Select Sector, which comprises companies from electric utilities, multi-utilities, independent power producers, and gas utilities. The fund employs a passive investment approach to mirror the index's investment performance.

The ETF primarily focuses on U.S. exposure, with 99.8% of its assets allocated domestically. Within its subindustry exposure, Electric Utilities account for 57.2%, while Multi-Utilities comprise 26%. Analysts' ratings for holdings within XLU indicate an aggregate hold rating based on 301 analyst ratings covering 30 companies, representing 99.8% of the portfolio. The aggregate price target for these holdings is $70.85, with a range spanning from $61.24 to $80.60 across the same 30 companies, comprising 99.8% of the portfolio.

From a technical analysis perspective, the recent breakout and higher continuation across the overall sector is significant. On a higher timeframe, the sector ETF had been in a lengthy downtrend before the breakout out above the mid-$60s. The consolidation breakout, which occurred at the end of April and the beginning of May, confirmed the trend break and momentum shift. With the ETF trending above all major moving averages and its previous downtrend’s resistance, momentum is significantly on the upside.

But what if one wanted to gain exposure to specific stocks versus the overall sector? Let’s look at three stocks within the sector that have performed the best year-to-date.

Three Standout Utility Stocks

GE Verona

GE Verona NYSE: GEV is the top-performing S&P 500 utilities stock YTD, up an impressive 27.44%. The company, which was incorporated in 2023 and operates as a subsidiary of General Electric, is an energy company with three main divisions: Power, Wind, and Electrification. The Power segment produces and sells electricity using various methods, including hydro, gas, nuclear, and steam power. The Wind segment focuses on manufacturing and selling wind turbine blades. The Electrification segment offers grid, power conversion, solar, and storage solutions. The sentiment is positive for GEV, with a moderate buy rating based on nine analyst ratings.

NextEra Energy, Inc.

NextEra Energy NYSE: NEE is the second top-performing S&P 500 utilities stock YTD, up 21.49% on the year. The $151 billion company, with a 2.79% dividend yield and P/E ratio of 20, is the top-weighted stock in the XLU ETF, with a 13.9% weighting.

Notably, NEE's projected earnings growth for the full year is 8.24%, its dividend growth is strong, and it has a moderate buy rating based on fifteen analyst ratings. 

The Southern Company

Southern NYSE: SO is the second-largest holding of the sector ETF, with an 8.11% allocation and the third-best-performing utility stock YTD, up 11.4%. Like the names mentioned above, SO has positive sentiment and attractive metrics. Its dividend yield is 3.58%, and the stock has a P/E of 20.19. For the full year, SO has projected earnings growth of 7.77% and strong dividend strength based on several factors. Analysts are bullish on the company, giving it a moderate buy rating based on thirteen analyst ratings.