Best US Power & Utilities Stocks to Watch Into Q1 Earnings: BofA

Bank of America maintained Buy ratings across several utilities after management meetings, highlighting data-center-driven load growth (Evergy signed ~1.9 GW in Feb and now expects >7% annual load growth through 2030) and sturdy capital programs. Key company metrics: Eversource Q4 2025 non-GAAP EPS $1.12 and plans to file a Connecticut electric rate case in July (possible $1B AMI upside); Evergy Q4 EPS $0.42 and $350M notes due 2029 issued; H2O Americas raised long-term EPS growth target to 6–8% anchored on $2.99 2025 EPS; PPL guides 2026 ongoing EPS $1.90–$1.98 supported by $23B capex (2026–29). Regulators were generally constructive (FERC ROE set to 9.57% for New England transmission owners; Connecticut water PFAS recovery enacted), reducing regulatory risk and supporting positive analyst revisions and price-target moves.

Analysis

Improved regulatory tone across parts of the utility complex is not just a comfort story — it compresses policy uncertainty and should lower the utility equity beta and allowed return volatility over the next 12–36 months. That dynamic enables higher sustained capex with less equity risk premium, but it simultaneously concentrates execution risk: firms that hawk large multiyear programs become levered to project delivery rather than commodity cycles.

Data-center-driven demand and accelerated transmission builds create concentrated locational stress. Expect higher locational marginal prices and capacity needs in a small number of load pockets, which will favor vertically integrated utilities with control over local wires and create outsized margin capture for transmission contractors, transformer and cable suppliers; conversely, merchant generators and developers without firm interconnection rights will see their IRRs slide if build queues lengthen.

Water utilities moving to more automatic cost-recovery paths for emerging contaminants materially de-risks long-tail remediation exposures, improving free cash flow predictability over years rather than quarters. That reduces revenue volatility and should tighten credit spreads for acquisitive players, but near-term dilution risk exists while acquired rate base is absorbed and re-rates through regulatory processes.

Key near-term catalysts: regulatory filings and FERC/appellate actions (days–weeks) that reset allowed returns, rate-case approvals (months) that crystallize recovery pathways, and project execution milestones (quarters→years) that determine whether higher capex actually converts to rate base. The consensus optimism appears to underprice execution and supply-chain friction, while also underestimating the asymmetric benefit to capital goods suppliers and localized wholesale price capture.

Key Decisions for Investors

• Long EVRG (Evergy) equity, size 3–5% portfolio, accumulate into any 5–12% pullback ahead of a near-term rate-case or load-agreement update; thesis: durable rate-base growth with constructive regulatory posture. Risk: execution/coal-retirement cost overruns; target 25–35% upside over 12–24 months, stop at 10% below entry.
• Long ES (Eversource) via a 12–18 month call spread (buy 12–18m call, sell higher strike) to finance exposure to transmission/offshore wind commissioning. Reward: captures upside from de-risked projects with limited theta bleed; risk: project delays or ROE reversal. Position size 2–4% with asymmetry ~3:1 upside/downside.
• Long HTO (water utility) equity, 2–3% position, entered before next rate resets in key acquired territories; hedge with short-duration muni-credit ETF (size 50–100% of equity position) to capture tightening credit spreads while protecting against broad muni weakness. Expect 15–25% upside as PFAS recovery crystallizes over 12–36 months; downside from prolonged dilution until rates reset.
• Pair trade: long transformer/cable supplier ETF or selected names (engineering & construction suppliers) vs short a merchant renewable developer (size 1–2% net exposure). Rationale: supply-chain-driven pricing power for hardware vendors and margin compression for developers facing interconnection delays. Target 20% relative outperformance over 6–18 months; stop-loss 8% absolute on either leg.
• Event hedge: buy out-of-the-money put protection on a 5–7% notional of the utility basket for the next 3–6 months to guard against a sudden regulatory reversal or recession-driven data center demand shock. Acceptable cost ~1–2% of portfolio for asymmetric insurance against 15–30% drawdowns.