VPU - The 3 Most Undervalued Utility Stocks to Buy in June 2024
2024-06-10 06:00:00 ET
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
The Vanguard Utilities Index Fund ETF (NYSEARCA: VPU ) is up by about 9% year-to-date, suggesting that utility stocks have garnered fundamental support. The question now becomes: Are utility stocks overvalued, or are additional gains in store?
I, for one, believe utility stocks still have more to offer. My basis is that the U.S. economic outlook is uncertain, therefore lending the argument that investors will emphasize defensive sectors until further ado.
Utility stocks provide solid fixed-income proxies, due to their low volatility and high dividend yields. Given the instability embedded in today’s fixed-income markets, utility assets are set to gain popularity.
Well, if your vision aligns with mine, then here are three undervalued utility stocks to consider.
Global Water Resources (GWRS)
Global Water Resources (NASDAQ: GWRS ) owns and operates more than 29 water resource systems. The firm primarily offers water recycling and wastewater services in the United States. However, Global Water Resources has the potential to expand, due to the growing demand for industrial water efficiency.
The driving force behind Global Water Resources is its fundamental attributes. For example, the company is on a margin expansion journey, whereby its earnings before interest tax depreciation and amortization, or EBITDA, expanded by 4.5% to $5.4 million in its previous fiscal quarter.
Moreover, Global Water Resources has a return on common equity ratio, or ROE, of 13.34% , 47.63% higher than the sector median, illustrating its operational efficiency.
Some might argue that Global Water Resources’s price-to-earnings ratio of 50.92x means it is fundamentally overvalued. However, I beg to differ.
Although elevated, GWRS stock’s P/E ratio is at a five-year discount of 69.40%, conveying relative value. The stock has a forward dividend yield of 2.46% , which adds a floor to its stock price.
Global Water Resources’ stock is set to prosper due to systematic and idiosyncratic support.
Enbridge (ENB)
Enbridge (NYSE: ENB ) is a Canadian infrastructure company focused on Liquid Pipelines, Gas Transmission and Midstream, Gas Distribution and Storage, Renewable Power Generation and Energy Services.
Infrastructure stocks usually have long-term investor bases, which stabilizes their stock prices. Additionally, infrastructure funds often act as fixed-income proxies, due to their dividend yields.
Enbridge is no different with a forward dividend yield of 7.39%.
The abovementioned shows that Enridge is a stable, high-income stock. However, is ENB stock undervalued?
Well, its fundamental attributes and valuation metrics suggest it is. For example, Enbridge recently delivered a promising first-quarter earnings report, communicating an earning-per-share beat of eight cents , placing its price-to-earnings-growth ratio at merely 0.15x .
Enbridge also has a scintillating leveraged free cash flow margin of 9.11% , suggesting its economic value is intact.
ENB stock has traded relatively flat since the turn of the year. However, its fundamental zeal, stability and alluring dividend yield place it in the best-in-class territory.
American Electric Power Company (AEP)
The final stock on today’s list is American Electric Power Company (NASDAQ: AEP ), which recently earned a “buy” rating from Goldman Sachs (NYSE: GS ). According to Goldman Sachs, AEP is among a few stocks set to benefit from near-term power demand growth.
Goldman Sachs’ outlook makes sense. American Electric Power has established itself as a key player in the energy supply arena with a broad-based market share of 5.21% .
Adding on to that, the firm has converted its market stronghold into tangible results. For instance, AEP stock’s ROE of 11.36% is 25.74% higher than the sector median, showcasing its impressive shareholder value creation.
Furthermore, AEP stock holds a strong posture after its first-quarter earnings report and concurrent guidance. The company delivered $5 billion in quarterly revenue, a 5% year-over-year increase.
AEP’s first-quarter earnings-per-share surpassed its estimate by two cents. As for the firm’s guidance, American Electric Power Company stated that it anticipates a long-term growth rate between 6% and 7%, adding allure to this already highly touted stock.
Lastly, AEP stock looks good from a capital markets perspective. More specifically, its PEG ratio of 0.42x illustrates GARP, while its dividend yield of 3.99% is highly respectable.
On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines .
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for cross-asset research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa. He holds an MSc in Investment Banking from Queen Mary – University of London. Furthermore, Steve obtained his CFA Charter on April 26, 2024, and is working toward his Ph.D. in Finance. His articles are published on various reputable web pages such as Seeking Alpha, TipRanks, Yahoo Finance, and Benzinga. Steve’s articles on InvestorPlace form an interesting juxtaposition between mainstream opinion and objective theory. Readers can expect coverage on frequently traded stocks, REITs, fixed-income funds, CEFs, and ETFs.
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