Goldman Sachs says it’s time to buy this unloved global sector — and names some top stocks
Europe’s utilities sector may have come under pressure over the past three years, but Goldman Sachs says a shift is underway, naming stocks to play the industry in 2024. In a Jan. 8 note, the investment bank highlighted that utilities have lagged the wider European market by almost 20%, in large part thanks to the “steep increase in interest rates, which led to a significant de-rating in capital intensive activities (e.g. renewables, power grids), and by regulatory intervention during the Energy Crisis.” The region experienced soaring energy costs after cutting off Russian supplies following the country’s invasion of Ukraine in February 2022. But things are looking up for Europe’s utilities sector, according to Goldman Sachs’ analysts led by Alberto Gandolfi. “We believe that the improved outlook on inflation and interest rates is likely to favor capital intensive/long duration assets, such as Renewable Energy (where the capital cycle also appears to have positively inflected, as evidenced by rising returns) and Power Grids (where the market appears to be overlooking the incremental organic growth opportunities),” they wrote. U.S. Federal Reserve officials concluded in December that interest rate cuts are likely this year, but meeting minutes released by the central bank on Jan. 3 did not specify when. However, Goldman’s analysts pointed out that “only big upward moves in rates are highly correlated with sector underperformance.” Against this backdrop, they like stocks with “transformational stories,” that have either a “re-rating in their capital-intensive business, inflecting returns, accelerating grids investments, or strongly positive earnings revisions.” Stock picks German energy company RWE is among the stocks highlighted by Goldman, which said it continues to value its renewables business. Goldman has a buy rating on the stock, which is also on its conviction list of top picks. Its price target of 53.5 euros ($58.80) gives it around 31% upside potential. Italian electricity and gas distributor Enel is another Goldman favorite. The bank revised its price target on the company upward from 8.79 euros to 8.80 euros “on higher expected earning for Italian Hydro and a higher multiple for network activities.” The new target gives it around 30% potential upside. Another company that is buy-rated by Goldman includes Spanish solar panel producer Solaria . The bank has a price target of 22 euros on the company, giving it just over 33% potential upside. — CNBC’s Michael Bloom contributed to this report.
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