Shares of NextEra are currently trading at a more than three-year low, which likely has everything to do with the Federal Reserve’s hawkish monetary policy. For one, rapidly rising interest rates could make future projects costlier for NextEra.
The other problem is that utility stocks are often valued by conservative investors for their steady income. With short-term Treasury yields hitting highs not seen in a long time, investors may opt to move out of utilities and into safe government debt.
Despite these challenges, absolutely nothing has changed with regard to NextEra’s growth trajectory or strategy. Whereas most electric utilities deliver sustained growth in the low single digits, NextEra is effectively a growth stock within the utility sector. Since 2007, its adjusted earnings have grown by a compound annual rate (CAGR) of 8.3%, with its dividends per share rising by a 9.9% CAGR over the same timeline.
NextEra’s secret sauce is its focus on renewable energy sources. It’s the world’s leading provider of solar and wind energy, and it collectively has 31 gigawatts (GW) of green energy in operation. According to the company, an estimated 32.7 GW to 41.8 GW of new green-energy projects are slated to go into operation between the start of 2023 and end of 2026. These projects are meaningfully lowering NextEra’s electricity generation costs and bolstering its adjusted profits.
Additionally, NextEra Energy provides a basic necessity service. If you own or rent a home, there’s a pretty good chance you’ll need electricity to power your appliances and/or HVAC system. This means electricity consumption doesn’t change much from one year to the next. Having exceptionally predictable operating cash flow is what allows NextEra to grow its dividend, undertake new projects, and even make acquisitions, without adversely impacting its bottom line.
Lastly, NextEra is trading just a hair below a forward price-to-earnings (P/E) ratio of 20. This marks its cheapest valuation, relative to forward earnings, since 2016.
U.S. Bancorp
A second no-brainer stock that can confidently be purchased with $100 right now is leading regional bank U.S. Bancorp (USB ). Chances are you’re more familiar with its subsidiary, U.S. Bank.
Most bank stocks — but especially regional banks — have been clobbered in 2023 on the heels of three notable bank failures: SVB Financial‘s Silicon Valley Bank, Signature Bank, and First Republic Bank. These regulatory seizures put deposits and common equity tier 1 (CET1) ratios squarely in focus.
These three bank failures came at a particularly bad time for U.S. Bancorp, given that it had recently closed its purchase of Union Bank from Mitsubishi UFJ Financial Group, which led to a decline in its CET1 capital ratio. Poor consumer and investor sentiment can be a dangerous thing for banks, as we’ve seen before. Thankfully, cooler heads prevailed, and U.S. Bancorp has continued to improve as a company.
The addition of Union Bank provides U.S. Bancorp with 1.2 million new consumer accounts, many of which have extremely low deposit costs. Eventually, this merger is expected to save the company around $900 million annually. Most importantly, its CET1 capital ratio bounced back 60 basis points to 9.1% from 8.5% between the end of March 2023 and the end of June.
Another clear reason to be optimistic about bank stocks, in general, is the Fed’s monetary policy. For banks with outstanding variable-rate loans, every rate hike provides a lift to their net-interest income. With core inflation remaining stubbornly high due to housing, a long-winded period of above-average interest rates could really pad banks’ pocketbooks.
U.S. Bancorp’s digital push is among the best in the banking industry as well. As of one year ago, more than 80% of its active users were banking online or via mobile app, with north of 60% of total sales completed digitally. Digital transactions are substantially cheaper than in-person interactions for banks.
A forward P/E of 8, along with a 5.4% dividend yield, makes U.S. Bancorp a screaming buy.
Sirius XM Holdings
The third no-brainer stock to buy with $100 right now is none other than satellite-radio operator Sirius XM Holdings (SIRI ).
One of the biggest reasons Sirius XM is having a rough year is because of the belief that the U.S. economy will weaken. Most radio operators tend to be reliant on advertising revenue — and advertising spending is highly cyclical.
The other issue for Sirius XM is rapidly rising interest rates. Sirius XM is carrying around a reasonable amount of long-term debt, which means future refinancing’s could be costlier. While these are tangible headwinds, they’re heavily outweighed by the company’s competitive advantages.
To start with, Sirius XM is a legal monopoly in the satellite-radio arena. Though this doesn’t remove competition from terrestrial and online providers, being the sole approved satellite-radio operator affords the company a degree of pricing power with its subscriptions that will help it outpace the rate of inflation.
Sirius XM’s revenue breakdown is another key selling point. Unlike terrestrial and online radio providers, which are almost entirely reliant on advertising revenue, Sirius XM has generated less than 19% of its total sales through the first six months of the year from advertising. Prior to purchasing Pandora in 2019, it generated almost every cent it brought in from subscriptions.
Subscribers are far less likely to cancel than advertisers are to pare back their spending at the first sign of economic weakness. In other words, Sirius XM is far better positioned to contend with economic downturns than other radio providers.
Furthermore, there’s a degree of cost predictability Sirius XM provides that won’t be found with other radio companies. For instance, transmission fees and equipment costs aren’t going to change if the company adds 1 million or 10 million new subscribers. Over many years, these relatively fixed costs should allow Sirius XM to expand its operating margin as its subscriber count (and subscription prices) rise.
Finally, Sirius XM is historically inexpensive. Shares can be purchased right now for about 13 times forward-year earnings, which is well below its average forward-year P/E over the past five years of 22.
