While not everyone will agree, under current circumstances, utility giant Duke Energy (NYSE:DUK) represents a Strong-Buy, must-watch stock, in my opinion. Fundamentally, the company benefits from a captive audience. No matter what happens in the economy, households and businesses must pay their utility bills. As a result, I am bullish on DUK stock.
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Fundamental Headwinds Sell the Story Behind DUK Stock
Usually, a publicly-traded company must actively sell its case to prospective stakeholders regarding why betting on the subject enterprise offers better returns than alternative investments. However, for DUK stock, the key benefit is that outside negative fundamentals do much of the heavy lifting. In other words, Duke Energy fortuitously happens to sell itself.
First, a core incentive for participating in the equities market is to generate capital gains. Therefore, it’s no surprise that entities such as Nvidia (NASDAQ:NVDA) blossomed this year. With artificial intelligence and machine learning poised to spark a paradigm shift in economic and social norms, companies powering this transition deserve a heightened premium.
However, even mighty Nvidia cannot ignore the implications of monetary policy. Last week, the Federal Reserve stated that it will keep the benchmark interest rate steady as expected. Moreover, policymakers framed the economic backdrop in generally positive terms. Based on the wording, it appears that they’re optimistic about facilitating a soft landing.
Still, the Fed also left the door open for one more rate hike before the end of the year. Recently, market sentiment has focused on a read-between-the-lines narrative. Thus, even the surging NVDA fell almost 8% in the trailing one-month period.
Interestingly, during the same period, DUK stock has remained flat. With market participants apparently no longer interested in high-flying technology names, the predictability and permanence of Duke’s utility business should attract more buyers.
Duke Energy Offers No Trade-Down Alternative
Generally speaking, what makes discretionary investments vulnerable ahead of a possible market downcycle is the trade-down effect. Basically, consumers can almost always trade down to cheaper alternatives of discretionary goods or services. However, barring an effort to literally go off the grid, utility users can’t trade down their services.
For better or for worse, utilities like Duke Energy benefit from a natural monopoly. Essentially, would-be competitors don’t even try due to the enormous barriers to entry, not to mention other regulatory hurdles. And on a related note, users have little choice but to pay up. So, DUK stock is effectively permanently relevant.
In fairness, Duke – like many other utility players – doesn’t exactly feature great financials. For example, it features questionable stability in the balance sheet, with cash and cash equivalents of only $20 million versus long-term debt of $69.91 billion as of the most recent quarter.
However, what really matters is profitability, where Duke consistently prints positive figures on the bottom line. Now, such predictability means that during decisively optimistic market cycles, entities like DUK stock don’t perform well. After all, it’s gambling on the unknown that often yields the greatest rewards.
Nevertheless, when faced with economic uncertainty, any kind of certainty commands a higher premium. Financially, that appears to be the case with DUK stock, which trades at a 15.65x forward earnings multiple compared to the underlying industry’s 18.9x.
Options Traders Don’t Agree
Before you dive into DUK stock, you should be aware that options traders don’t seem to agree with the bullish thesis. Specifically, options flow data – which screens exclusively for big block trades – shows heightened interest in pessimistic trades since September (either sold calls or bought puts).
What’s particularly bothersome is that it appears one major trader sold (wrote) 2,944 contracts of the Oct 20 ’23 85.00 call option on September 1, receiving a premium of nearly $1.26 million in the process. That seems an aggressively bearish wager, given the fundamental relevance of DUK stock.
Still, the narrative behind Duke Energy is powerful. People who wish to live normal lives must pay their utility bills. Therefore, while acknowledging the risks, DUK stock seems more like a Buy than a Sell.
Is DUK Stock a Buy, According to Analysts?
Turning to Wall Street, DUK stock has a Moderate Buy consensus rating based on six Buys, six Holds, and zero Sell ratings. The average DUK stock price target is $99.75, implying 10.7% upside potential.
The Takeaway: DUK Stock is an Obvious Play That Deserves Attention
With DUK stock, the outside fundamentals do the heavy lifting in terms of marketing the investment proposition. Therefore, despite the noise from the options market, it might help not to overthink Duke Energy. It’s a utility play whose time has come. In my opinion, it’s really as simple as that.
