After a discombobulating experience for investors who saw American households suffer from stifling inflation while equity valuations soared to record heights, 2024’s trajectory remains anyone’s guess. Given this ambiguity, investors may want to keep warm this winter with utility giant Sempra Energy (NYSE:SRE). While it’s hardly the most exciting idea, Sempra practically offers permanent relevance. Therefore, I am bullish on SRE stock because of its no-brainer profile.
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SRE Stock Should Rise Above the Ambiguity
To be 100% clear, all proposals in the capital markets carry risks. However, to use a baseball analogy, SRE stock is the equivalent of a sacrifice fly. While you may give up an out – and perhaps the opportunity for multiple runs – you’re also choosing to get something out of the inning rather than nothing. And that’s what Sempra is: a sac fly to get something on the board.
Of course, by choosing the San Diego, California-based public holding company over other compelling but risky market ideas, you could incur an opportunity cost. Right now, sentiment for risk-on asset classes – including some of the most speculative categories like cryptocurrencies – has soared. Fundamentally, investors have been encouraged by the Federal Reserve hinting at the possibility of three interest rate cuts next year.
Nevertheless, investors need to ask themselves a serious question: what if rate cuts don’t materialize? Even worse, what if policymakers decide to raise borrowing costs to slow the pace of inflation? It’s not an unreasonable proposition. Following the stronger-than-expected print of the November jobs report, the underlying circumstance implies that more dollars continue to chase after fewer goods.
Because monetary policy and the broader market trajectory can move in unexpected ways, it’s vital to at least consider exposure to economically “agnostic” names. Here, SRE stock truly shines. At its most cynical, utility companies should benefit irrespective of the economy’s ebb and flow. That’s because no matter what happens, people and businesses need to pay their bills.
Also, enterprises like Sempra enjoy natural monopolies. Legally, nothing prevents other companies from competing. However, because Sempra and its ilk are entrenched, the costs associated with creating an alternative provider don’t make financial sense. Also, utilities represent a highly regulated industry, thus imposing a steep barrier to entry.
The California Exodus is More Nuanced Than You Think
Frankly, there shouldn’t be much (if any) disagreement about the aforementioned arguments. No matter what region you consider, the leading utility players are boring because their underlying businesses are so predictable. Again, entities can’t live or operate without power and critical resources. However, for SRE stock, one seemingly sour headwind stands out: the California exodus.
Browse the internet and social media platforms, and it won’t take long to find doom-and-gloom stories of people leaving the Golden State in droves. From escalating costs of living to societal and infrastructural challenges to vast political and ideological differences, many have had enough. It’s an understandable sentiment and it’s not just the working class that’s feeling the heat.
According to a recent article by the Los Angeles Times, the wealthiest Californians are fleeing the state. That sounds ominous and the story itself doesn’t hold back any punches regarding potential economic impact. So, wouldn’t this matter be of serious concern for SRE stock?
While major migration trends – especially involving affluent individuals – should never be dismissed, a greater context is necessary. Primarily, California is a huge state. So, it’s important to note where the exodus is happening.
As for SRE stock, Sempra operates in Southern California. Specifically, it dominates its hometown of San Diego. Sure enough, America’s Finest City has enjoyed perpetual growth. And while this growth will eventually end, experts project that the beach town’s population will peak in 2042. That gives Sempra a long runway.
Financials Prove the Point
If you need more evidence of Sempra’s viability, just look at its top line. Admittedly, the company’s post-Great Recession revenue figures have been inconsistent, printing expansions in some years and erosions in others. However, since 2018, the utility has benefited from consecutive annual sales growth.
Moreover, its trailing 12-month (TTM) revenue tally of $16.68 billion is particularly impressive. That comes out to 15.5% growth from 2022’s sales haul of $14.44 billion. So long as the core market continues expanding its population – and that’s what the data shows – SRE stock should be a relevant idea.
Wall Street’s Take on Sempra
Turning to Wall Street, SRE stock has a Strong Buy consensus rating based on nine Buys, two Holds, and zero Sell ratings. The average SRE price target is $81.00, implying 8.78% upside potential.
The Takeaway: SRE Stock is Beautifully Boring
While riskier sectors tempt investors with potential windfalls, Sempra Energy offers a safe haven. Its utility dominance in San Diego’s growing population helps ensure consistent revenue, making it an economically agnostic pick for uncertain times. And while it’s boring, steady growth and predictable financials undergird SRE stock, making it a compelling long-term play.
