Utilities Outperform in 2024: 3 Stocks to Keep on Your Radar

Key Points

• The utility sector has surged nearly 30% YTD, outperforming both the QQQ and SPY ETFs, which are up closer to 20%.
• This rally is fueled by rising electricity demand from AI infrastructure, renewed focus on nuclear energy, and interest rate cuts.
• Key players like XLU, NextEra Energy, and Vistra offer diversified exposure, blending growth potential with steady income opportunities.

In a surprising turn of events, the utilities sector has emerged as one of the best-performing sectors of 2024. Year-to-date (YTD), the Utilities Select Sector SPDR ETF NYSE: XLU is up nearly 30%, outpacing the QQQ ETF and the S&P 500 ETF NYSE: SPY, both of which have gained closer to 20%. This rally has defied expectations, driven by an interest rate cut, renewed nuclear energy initiatives, and even the rise of artificial intelligence (AI). Investors looking for growth beyond traditional tech and healthcare sectors may find opportunities in the utilities space as some stocks continue to hit new highs.

What’s Driving the Surge in Utilities?

While the utility sector isn’t typically associated with high-growth narratives, a combination of tailwinds has driven its stellar performance in 2024. One of the biggest catalysts is AI’s growing power demands. Data centers and other AI infrastructure require vast electricity, creating long-term growth opportunities for power providers. Additionally, rate cuts have boosted investor interest in utilities, which typically perform well in lower-rate environments. Finally, a renewed focus on nuclear energy, long considered essential for a cleaner future, has given the sector additional momentum.

With utility stocks outperforming high-growth sectors like technology and financials, here are three top utility plays worth considering.

XLU ETF: The Best Play for Broad Sector Exposure

For investors seeking diversified exposure to the utilities sector, XLU is the go-to ETF. It tracks the Utilities Select Sector of the S&P 500 Index, covering industries such as electric utilities, energy traders, and gas utilities. The fund manages nearly $19 billion in assets and offers a 2.51% dividend yield, a solid income component.

With 99.9% exposure to the U.S. market, XLU’s portfolio leans heavily into electric utilities (57%) and multi-utilities (25.9%). Despite its rally, the ETF's Relative Strength Index (RSI) suggests it is not yet overbought territory, leaving room for additional gains. Analysts rate XLU a Moderate Buy, with a consensus price target indicating further upside.

NextEra Energy: A Sector Giant Positioned for Growth

NextEra Energy NYSE: NEE, the largest holding in the XLU (14.12%), is a dominant force in the utilities sector with a $173 billion market cap. The company operates a mix of fossil-fuel and green energy generation, making it a leader in both conventional and renewable energy. With a 2.4% dividend yield and a forward P/E ratio of 22.9, NextEra offers a balanced mix of income and growth potential.

The company’s renewable energy backlog grew to 22.6GW in Q2, up from 21.5GW in Q1, positioning it well to meet its 40GW target for 2024-2027. Demand from data centers driven by AI and reshoring activities is expected to boost electricity usage, further benefiting NextEra. Additionally, its Turkey Point Nuclear Plant recently secured a 20-year license renewal, solidifying its role as a critical energy provider in South Florida.

As NextEra approaches its earnings release on October 23, analysts expect a 7.29% earnings increase this year, building on its strong financial performance. In Q2, the company reported $0.96 EPS, beating estimates by $0.03.

Vistra: A Utility Stock Riding the AI Boom

One of the most intriguing plays in the utilities sector is Vistra NYSE: VST, which has surged 252% YTD. Stanley Druckenmiller, a renowned investor, sold his NVIDIA shares in 2023 and began accumulating Vistra, signaling confidence in the company’s future as an AI infrastructure play.

Vistra’s business model aligns perfectly with the rising electricity demand. The company operates 41,000 MW of generation capacity, including 6,400 MW of nuclear energy, and holds the second-largest energy storage capacity in the U.S. at 1,020 MW. As AI-driven data centers and semiconductor foundries ramp up their power needs, Vistra is well-positioned to meet the growing demand.

Analysts remain bullish on the stock, with 10 Buy ratings and a consensus price target of $141.30, implying about 8% upside from current levels. Vistra’s acquisition of Energy Harbor earlier this year further bolsters its energy storage capabilities and nuclear energy production, setting the stage for continued growth.