Following the rapid rise in interest rates brought on by the Federal Reserve’s unprecedented rate hikes two years ago, utility stocks languished. Borrowing costs accelerated because utilities are capital-intensive businesses that rely heavily upon debt financing. 

Utility stocks were the worst performing sector last year, but the promise of interest rate cuts — perhaps as soon as this month — and the build out of data centers due to the demands of artificial intelligence, have turned around the industry’s outlook. Utilities are one of the best-performing sectors in 2024. The S&P 500 Utilities Sector index is up 20% year-to-date, fractions of a percentage point behind tech stocks and financials.

Wall Street is also much more upbeat about utility stocks and have upgraded their ratings on them. Below are two of the best that analysts have a “strong buy” rating to and see double-digit potential in their stocks.

Key Points About This Article:

• Utility stocks have lagged behind the broader market due to rising interest rates that have raised the cost of borrowing for the capital-intensive businesses.
• The prospects for rate cuts and the buildout of data centers, which have a voracious appetite for electricity, have turn the utility sector into one of this year’s best performers.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

Brookfield Infrastructure Partners (BIP)

Brookfield Infrastructure Partners (NYSE:BIP) is not your run of the mill utility. In addition to traditional utility operations, Brookfield is one of the largest owners and operators of critical global infrastructure networks. Among them are railroads, toll roads, ports, data centers, data transmission assets, and semiconductor manufacturing foundries.

That diversification of assets is why Brookfield was able to notch a 1.6% gain in 2023 compared to the 10% loss notched by the sector index. Year-to-date, though, Brookfield is essentially flat, which gives investors an excellent entry point.

The diversified infrastructure play engages in what it calls “buy, enhance, sell, repeat,” a process of selling off older, more mature assets and buying into newer, higher return opportunities.  

So far this year, Brookfield has completed seven follow-on acquisitions that account for nearly $4 billion of enterprise value, including the acquisition of 40 data center sites and a 10% increase in its stake in a Brazilian integrated rail and port logistics operation. 

Brookfield operates under long-term contracts and regulated frameworks that underpin 90% or more of their funds from operations. FFO rose 10% in the second quarter to $608 million.

The infrastructure stock pays a dividend that yields 5.2% annually. Over the past five years it has increased the payout at a ferocious 22% compound annual growth rate. Analysts have assigned a one-year consensus price target of $37.56 per share, implying 20% more upside in Brookfield’s shares, making it a utility stock that you should buy now. 

Vistra (VST)

Vistra (NYSE:VST) is a utility that will benefit from the increased demands placed on data centers by AI because the technology is an all-consuming energy hog. 

The International Energy Agency (IEA) estimates that as a result of AI’s growth, data centers total electricity consumption will hit over 1,000 terawatt-hours (TWh) in 2026, or “roughly equivalent to the electricity consumption of Japan.” Boston Consulting Group forecasts AI-powered data centers will consume 7.5% of all electric output by 2030, or three times as much as they did in 2022.

Vistra is one of the largest electric utilities in Texas but it recently expanded into 20 new states following its acquisition of Energy Harbor, a traditional electric utility and a nuclear power operator. Vistra is now the second-largest nuclear power generation provider in the country as a result of the deal.

It has split its operations into two separate units, traditional and vision. The latter houses its nuclear assets as well as its renewable energy base. By separating the two, Vistra could spinoff or sell either division in the future. Yet the nuclear option gives Vistra some leverage in dealing with data centers because of the lower pricing it offers, not to mention the carbon-free aspects of it. 

Vistra stock has been an industry leader this year, doubling in value in 2024 and rising 143% over the past 12 months. With strong tailwinds behind it, it is understandable why Wall Street is behind Vistra and its future growth potential. With a consensus price target of $87.83, analysts believe the utility could add an additional 15% to its stock price.

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