Utility stocks are riding high on the artificial intelligence boom, which is driving demand for electricity. For example, the Vanguard Utilities ETF has soared nearly 21% year to date, outpacing the S&P 500 by 18%. But according to Morningstar’s Dave Sekera, the industry has now gone too far. Morningstar recently changed its rating on the utilities sector to underweight from an overweight rating at the beginning of the year, he said. Data centers contain large amounts of computing power required for artificial intelligence workloads, but they also consume large amounts of power. Their power consumption will grow steadily, a trend that has given utility stocks a big boost this year. “Based on how these stocks are trading today, if you just buy utilities, based on this story, I think you’re 10 months out, you know, it’s too late to make a trade now,” said Sekera, chief U.S. market strategist. “Of course, artificial intelligence chips require several times the power of traditional chips, but this is already reflected in the prices of these stocks,” he said. Sekera said the shares are now up about 21% year to date, with the industry trading at an 8% premium to Morningstar’s fair value estimate. Still, for investors who still want to get in on the game, Sekera singled out two utility stocks that he said are still somewhat undervalued compared to Morningstar’s fair value estimates. One of the stocks is Entergy Corporation, which Sekera said trades at a 6% discount to fair value estimates and has a dividend yield of 3.8%. “This is the best combination of growth value and dividend yield,” he said. Another is NiSource, which he said trades at a 7% discount and has a 3.25% dividend yield. Sekera said he would trade the two stocks for other positions in the utility company. Two utility stocks he believes are overvalued compared to Morningstar’s fair value estimates, Southern Co. and Dominion Energy Inc., which he said trade at premiums of 23% and 18%, respectively.
