Utilities stocks have been a red-hot play off the artificial intelligence boom, with AI leading to the need for much power. The Vanguard Utilities ETF, for instance, has soared nearly 21% year-to-date, more than the S & P 500’s 18%. But the sector has now run too far, according to Morningstar’s Dave Sekera. He said Morningstar recently changed its recommendation for the utilities sector to an underweight rating from an overweight one at the start of the year. Data centers, which house vast amounts of computing power needed for AI workloads, also gobble up much electricity. Their power consumption is set to grow at a steady pace, and the trend has given a big boost to utility stocks this year. “Based on where those stocks are trading today, if you’re just buying utilities, based on that story, I think you’re 10 months, you know, too late to that trade,” Sekera, who is chief U.S. market strategist, told CNBC’s ” Street Signs Asia ” on Tuesday. “Of course, artificial intelligence chips require multiple times more power than just traditional chips, but that’s already priced into those stocks at this point,” he said. At this point, these stocks are already up around 21% year-to-date, with the sector trading at an 8% premium over the fair value estimate that Morningstar gave it, Sekera said. Nevertheless, for investors who still want to get into the game, Sekera singled out two utilities stocks he says are still somewhat undervalued compared with Morningstar’s fair value estimate. Stocks One is Entergy Corporation , which Sekera said is trading at a 6% discount to the fair value estimate, and has a 3.8% dividend yield. “That just has the best combination of growth value and dividend yield,” he said. The other is NiSource , which is trading at a 7% discount and giving a 3.25% dividend, according to him. Sekera said he would use those two stocks to swap out of other positions within utilities. Two utilities stocks he considered overvalued compared with Morningstar’s fair value estimate are Southern Co and Dominion Energy , which he says are trading at a 23% and 18% premium, respectively.
