Once boring utility stocks are now an investor favorite. These names have the most upside from here

The utilities sector has become a top performer this year, up 18% in the S&P 500, largely fueled by unprecedented electricity demand from data centers and AI. Despite substantial year-to-date gains, analysts project further upside for several key companies. Constellation Energy (CEG) is seen with 13% additional upside, Edison International (EIX) with 16% despite fire liability concerns, and NRG with 20% following strong earnings and a $3 billion share buyback. Vistra (VST) shows 27% potential due to its flexible power sales strategy, while PG&E (PCG) leads with 29% upside, supported by a recent Fitch upgrade, though regulatory decisions pose ongoing risks.

Analysis

The utilities sector has emerged as a significant outperformer in the S&P 500 this year, posting an 18% gain, driven primarily by unprecedented electricity demand from data centers and AI. This surge in demand is translating into substantial earnings growth for power producers, allowing companies with excess capacity to command premium pricing. Four companies within the S&P Utilities group—NRG, Constellation Energy, Vistra, and American Electric Power—have already seen gains exceeding 30%.

Despite these strong year-to-date performances, analysts project further upside for several key players. NRG, with a 91% YTD gain, is forecast for an additional 20% upside following earnings that significantly beat estimates and a recently announced $3 billion stock buyback. Vistra Corp. is anticipated to have 27% more upside, largely attributed to its flexible power sales strategy which allows it to capitalize on high-bid opportunities rather than being locked into long-term contracts, leading to recent target price increases from BNP Paribas, BMO Capital, and Evercore ISI.

However, investment considerations vary across the sector. Constellation Energy (CEG), despite a 60% YTD gain and 13% projected upside, faces caution from two analysts with targets below its current price, though its plan to restart Three Mile Island for Microsoft is a notable catalyst. Edison International (EIX) carries significant legal and litigation risk from the Eaton fire, despite analysts projecting 16% upside. PG&E (PCG), with the highest projected upside at 29% and a recent Fitch credit upgrade, is navigating fire mitigation costs and regulatory decisions that currently depress its valuation, offering a P/E discount despite strong earnings growth.

Key Decisions for Investors

• Focus on utilities with clear growth catalysts and strong fundamentals, such as NRG's significant buyback and Vistra's adaptable power sales strategy, which support continued upside potential.
• Exercise heightened due diligence for companies like Edison International and PG&E, where legal liabilities or regulatory decisions could introduce volatility despite projected analyst upsides.
• Continuously monitor the escalating demand from data centers and AI, as well as the evolving regulatory environment, as these macro trends are critical drivers for sector profitability and individual stock performance.