Guggenheim Securities LLC on Jan. 7 downgraded several utilities, including American Electric Power Co. Inc., advising investors to focus on individual stocks in 2019 because of "limited upside and downside potential" in a broader utility portfolio.
"[S]tock picking is more important now than ever," Guggenheim analyst Shahriar Pourreza wrote in the firm's 2019 utility outlook. "[W]e wouldn't go into 2019 owning a basket of utilities. [T]he group is getting pricey, but we believe there are plenty of opportunities to find value within the sector as was the case in , with no shortage of stock-specific catalysts on the horizon, or long/short battlegrounds, in addition to some value the market typically takes longer to catch-up with."
Guggenheim downgraded AEP, OGE Energy Corp., Spire Inc. and Clearway Energy Inc. to "neutral" from "buy" on valuation and strong 2018 performance, which is already baked into the stock prices. The firm also downgraded New Jersey Resources Corp. to "sell" from "neutral" based on "fewer incremental items of note going forward."
"[W]e have become very selective," Pourreza wrote in the report.
When it comes to AEP, the analyst said the firm sees "better re-rating opportunities with other fully regulated electric peers like [Entergy Corp. and FirstEnergy Corp.], who trade cheaper and have higher growth prospects (albeit with some higher leverage)."
"AEP worked in  as best it could, has good growth prospects but at this stage, fully priced in," Pourreza wrote, pointing to the Public Service Co. of Oklahoma electric rate case or a strategic move as potential near-term catalysts.
On OGE, Guggenheim said the downgrade is "driven mainly by valuation as it comes on the heels of a great run in 2018 outperforming the utility sector by over 18%."
Guggenheim said it now sees a better investment opportunity in CenterPoint Energy Inc., which has underperformed the utility sector.
The firm upgraded CenterPoint to "buy" from "neutral" and added the company to its "Best Idea" list, replacing NRG Energy Inc.
"We believe [CenterPoint] has solid Texas utility fundamentals with ~8% growth through 2022 in our estimates, with additional upside potential coming by way of the [Vectren Corp.] acquisition and potential for accelerated growth based on expectations of deferred capital being brought back into the plan," Pourreza wrote.
Guggenheim also upgraded NiSource Inc. to "buy" from "neutral" on valuation along with "eventual removal of the gas explosion overhang and incremental growth opportunities."
The National Transportation Safety Board is leading the investigation into a deadly September 2018 series of gas explosions and fires on NiSource subsidiary Columbia Gas of Massachusetts' distribution system. A preliminary NTSB investigation report found that human error likely played a critical role in the disaster.
"[NiSource] has worked diligently to resolve investigative matters and will be looking to put extra capital to work on system safety, which could accelerate growth and re-rate the stock on the safety story," Pourreza wrote. Guggenheim said it does not believe that NiSource's handling of the explosions has damaged its regulatory relationships.