Three hot stocks in a booming sector
Having already tipped two of these successful companies at lower prices, analyst Rodney Hobson reviews prospects and reveals which of these shares he’d keep buying.
28th May 2025 08:06
by Rodney Hobson from interactive investor
Energy companies are supposed to be dull, solid investments for those who seek certainty rather than excitement. In the somewhat weird world of President Donald Trump, American gas and electricity suppliers have suddenly become star performers, replacing the much bigger and brassier technology companies in the eyes of investors looking for quick profits.
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Duke Energy Corp (NYSE:DUK) shares stood at $105 in early January but shot up to $124 by mid-April, an 18% gain in just over three months, as Trump’s crusade to bring manufacturing back to the United States promised a surge in demand for energy.
Source: interactive investor. Past performance is not a guide to future performance.
Latest quarterly results were well received, showing revenue of $8.2billion, in line with expectations, while profits were up 22% to US$1.76 per share, slightly ahead of analysts’ forecasts.
The figures, the first under new chief executive Harry Sideris, were good enough for analysts to stick with their belief that revenue will edge up 3.1% for this year as a whole while earnings per share (EPS) will rise about 5.6%. This is a solid performance that well befits a solid company, which is itself confident of 5-7% annual growth in earnings through to the end of 2029, with a step up in performance in 2027. These are pretty reliable figures as there is good visibility of revenue from gas and electricity operations thanks to rates agreed with regulators.
Duke is planning well for the future, diversifying its energy sources and upgrading aging infrastructure before it is too late. Approval has just been received from the Nuclear Regulatory Commission to extend the operating licence for the Oconee nuclear station for an additional 20 years. It has the capacity to power North and South Carolina for another 30 years. Other nuclear plants plus natural gas and hydro power units will have their capacities increased and operating lives expended.
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US energy companies will be reasonably insulated from the effect of tariffs, which is just as well given the constant chopping and changing of threats against various countries, which suggests that there is no coherent plan. Duke reckons the impact could add 1-3% to the cost of its capital spending but the main chunk, on American labour, is unaffected by tariffs. Duke also believes that its size as America’s biggest energy supplier will enable it to smooth out any problems in its supply chain.
Duke shares have been back down to $112 this month but are perking up again at $116, where the price/earnings (PE) ratio is not too demanding at 19 and the yield is quite attractive at 3.6%.
Southern Co (NYSE:SO), a smaller but ambitious power supplier,had a great run over most of last year to peak at $94, before coming off the boil to settle back to $81 in January. However, it has greeted the new president with a recovery to $90, where the ratios are only slightly less favourable than at Duke with a PE of 21.5 and a yield of 3.25%.
Source: interactive investor. Past performance is not a guide to future performance.
NRG Energy Inc (NYSE:NRG)has gained most from the Trump effect, shooting up from below $90 to nearly $160 and taking the PE to a more demanding 25. The yield at just over 1% is not so appealing.
Source: interactive investor. Past performance is not a guide to future performance.
Hobson’s choice: I have long been a fan of Duke Energy, having first recommended the shares below $90 as long ago as 2019. Since then there has been a modest capital gain to accompany a solid dividend. My last buy tip was in November at $113 after a small dip. Duke shares are only a couple of dollars higher than they were three years ago when the world was still getting over Covid, yet the prospects look much brighter now. Buy.
I also rated Southern a buy six years ago at $54. It is still a great alternative buy in the energy sector. NRG, though, looks to have risen quite far enough for now and rates only a hold.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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