Utilities stocks are supposed to be safe, attractive investments for retirees, right? Not always, as NextEra Energy (NYSE:NEE) stock has been in free-fall mode lately. While NextEra Energy is certainly encountering issues, I am bullish on NEE stock because I believe the market is overreacting, and that’s exactly when I start to get interested.
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Some folks might put NextEra Energy in the clean energy category because the company produces wind, solar, and nuclear power. However, NextEra is still mainly known to its customers as an electric company that uses old-fashioned fuel sources like coal and natural gas.
Now, I wouldn’t want anyone to think about buying NEE stock without knowing why it has plummeted in recent weeks. When all is said and done, however, you might agree with me that NextEra Energy still has plenty of long-term value to offer its shareholders.
News Flash: Many Traders Hate Utilities Stocks Now
Sector rotation is always occurring in the financial markets. Sometimes it’s subtle, and other times, it’s violent. Don’t get too frustrated when investors rotate out of one market sector and into another, though, as this opens up windows of opportunities for contrarian investors.
Currently, some traders may be rotating out of utilities stocks and into relatively risk-free government bonds, money market accounts, and certificates of deposit (CDs). This is to be expected, as these asset types compete directly with utilities stocks, which don’t move fast but offer enticing dividend yields.
Hence, a number of safety-minded investors are likely choosing 10-Year Treasury bonds, which yield 4% to 5%, over utilities stocks. As I see it, U.S. government bonds are highly attractive to investors who previously relied on utilities stocks for yield when the bonds only paid 1.5% or 2%. Bear in mind, though, that rotations are temporary, and the tide always changes direction sooner or later.
Unless you expect “higher-for-longer” (to quote the Fed) interest rate policy to last forever, bond yields should drop at some point, and utilities stock could stage a swift recovery.
As for NextEra Energy in particular, investors were disappointed when related company NextEra Energy Partners (NYSE:NEP) cut its cash distribution per-share growth rate guidance from the previous range of 12%-15% annually through 2026 to a revised range of 5%-8% growth per year through at least 2026, with a target annual growth rate of 6%.
In other words, NextEra Energy Partners won’t grow its dividend as quickly as previously anticipated, and it’s reasonable to surmise that NextEra Energy’s 3.2% forward annual yield might also not grow much in the coming quarters.
NextEra Energy: Two Analysts, Two Perspectives
Personally, I see good value now with NEE stock because NextEra Energy’s GAAP-measured trailing 12-month P/E ratio of 14.1x looks more favorable than the sector median P/E ratio of 17.6x. Furthermore, NextEra still pays a decent dividend — and again, this dividend might exceed what government bonds offer if interest rates eventually get cut.
However, apparently not everyone is optimistic about NextEra Energy’s future prospects. The main reason that NEE stock fell by approximately 9% on Monday is because Wells Fargo (NYSE:WFC) analyst Neil Kalton downgraded NextEra Energy shares from Buy to Hold and, believe it or not, chopped his price target on the stock from $80 to just $33.
Among other considerations, Kalton reportedly is concerned about NextEra Energy Partners’ revised guidance creating a “crisis in confidence” in the company “that will be difficult to restore.” I’d counter, however, that Kalton’s harsh price-target reduction is itself contributing to the confidence crisis.
In stark contrast, analysts with Morgan Stanley (NYSE:MS) see the recent share-price sell-off as “significantly overdone” given the “very limited financial impact on this update.” In addition, the Morgan Stanley analysts contend that NEE stock now prices in “minimal future growth” and feel that NextEra Energy’s fundamental growth outlook is intact. With that commentary, they maintain an Overweight rating and a $91 price target on NextEra Energy shares.
Is NEE Stock a Buy, According to Analysts?
On TipRanks, NEE comes in as a Strong Buy based on 14 Buys and two Hold ratings assigned by analysts in the past three months. Although this is liable to change in the coming weeks, the current average NextEra Energy price target is $80.94, implying 55.2% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell NEE stock, the most accurate analyst covering the stock (on a one-year timeframe) is Paul Fremont of Ladenburg Thalmann & Co., with an average return of 19.99% per rating and an 88% success rate. Click on the image below to learn more.
Conclusion: Should You Consider NEE Stock?
When it comes to NextEra Energy, you can choose to side with the pessimists or the optimists. However, the pessimism seems to already be priced into NextEra shares, and one analyst may have actually perpetuated the market’s feelings of gloom and doom.
I certainly won’t blame analysts for expressing their opinions. At the same time, I see good value with NextEra Energy and am excited to see the company’s shares trading at such a low price point. Consequently, I feel that bold contrarian investors should consider NEE stock before the market eventually rotates back into the utilities sector.
