Electric utilities, solar stocks: why they stall

2026-07-03 · By Lubin Danilo, founder of Lubin Investment

In my quality ranking, the best regulated electric utility, NextEra Energy, tops out at 7 out of 10, far from a perfect score. Solar climbs to 9 out of 10 without reaching it either. Only one exception hits the top: a water company, not an electric one. Here is why, with the numbers.

What to remember

• Out of the 43 companies I track in the Utilities - Regulated Electric sector (electricity delivered through a grid, with rates set by a regulator), none reaches the maximum quality score in my system: 10 financial criteria, scored out of 10. The best result, 7 out of 10, belongs to two companies, NextEra Energy (NEE) and American Electric Power (AEP).
• Solar does better without hitting perfection either: Nextpower (NXT) and TOYO Co (TOYO) cap out at 9 out of 10.
• Only one company close to this broad utilities theme reaches the maximum score of 10 out of 10: Consolidated Water (CWCO). But that is a water company, not an electric one, and I already covered it in my article on unexpected sectors.
• Some electric utilities trade at a valuation that looks absurd, up to 287 times their annual cash. That does not mean the market treats them as rare growth gems: it means the opposite, there is almost no free cash left once investments are paid for.
• The gap between water and electricity comes down to one word: capex, meaning capital spending. Its scale and its predictability change everything.

Why I look at this sector so closely

Every week, my screener runs hundreds of companies through the same ten financial criteria: profitability, revenue growth, cash growth, buybacks, controlled debt, return on capital, among others. Electric utilities and solar companies look, on paper, like they should shine in this framework. They are local or near local monopolies, with stable demand and, for some, decades of regular dividends.

In practice, that is not what my numbers show. Understanding why teaches more about how to judge a company than any ranking could. A score of 10 out of 10 in my screener means only one thing: the company checks every one of my financial quality criteria at the level I require. It is not a prediction, nor an opinion on the stock price, only a statement about the strength of the business.

The table that sums it all up

Here are the numbers, pulled from my screener as of July 3, 2026, for the main regulated American electric utilities, two solar players, and the exception found in the water sector.

P/FCF, price to free cash flow, the stock price divided by the free cash the business actually generates, measures how many years of available cash the current stock price represents. A P/FCF of 14, like NextEra Energy's, means you are paying fourteen years of that cash. A P/FCF of 287, like Exelon's, does not mean the market is betting on a rare growth gem, the way it might price an expensive tech startup. It means the opposite: so little free cash flow is left once investments are paid for that even a modest price, divided by that cash, produces a huge number. That is not a quality signal, it is a symptom of capex eating up the available cash.

Why regulated electric utilities cap out at 7 out of 10, not higher

A regulated utility is a company that owns essential infrastructure, power lines and substations, and sells its electricity at a rate set, or at least overseen, by a public regulator. In exchange for the local monopoly, the regulator authorizes a return on invested capital, currently around 9 to 10% in the United States. In practice, that mechanically caps what a shareholder can hope to earn, even when the company runs its grid perfectly. California's regulator set an authorized return close to 10% for the state's largest utilities for the 2026 to 2028 period. The federal regulator even lowered the authorized return for transmission owners in New England, from 10.57% in 2014 to 9.57% recently.

On top of that ceiling on profitability sits a nearly permanent need for capex. Close to 70% of the North American grid is more than 25 years old. It needs modernizing, hardening against extreme weather, and above all it needs to absorb a massive amount of new generation capacity, solar, wind, batteries, sometimes nuclear, to meet fast growing demand, especially from data centers built for artificial intelligence. Duke Energy plans to invest $145 billion over the next decade. NextEra Energy plans nearly $94.2 billion between 2025 and 2030. Most of that money is financed with debt, which weighs further on the cash left for shareholders.

Against that backdrop, NextEra Energy and American Electric Power stand out with 7 out of 10, the best score in the sector, and a markedly more reasonable valuation, 14.52 times and 27.08 times cash, than their peers. They manage the balance between grid growth and cash generation better. But even they fall short of perfection: their debt remains high and their capex needs stay elevated for years to come. You can check the details on NextEra Energy's page and on American Electric Power's page.

Solar keeps improving, without reaching perfection

Nextpower (NXT), formerly Nextracker, changed its name in November 2025 to reflect its evolution: the company no longer just sells solar tracking systems, the structures that turn panels toward the sun, but a full energy technology platform for solar plants, including systems meant to power data centers. TOYO Co, a Japanese company founded in 2022, manufactures solar cells and modules, with plants in Vietnam, Ethiopia, and, since October 2025, in the United States. Its gross margin rose to 22.5% in 2025, up from a notably lower level the year before.

Both score 9 out of 10, the best result in the clean energy theme of my screener, without reaching the maximum. What holds them back: a still real dependence on policy support, tax credits, feed in tariffs, subsidies for building renewable capacity, all of which can shift from one political cycle to the next, plus heavy investment cycles to build new plants. Unlike electric utilities, these are not regulated monopolies: they sell their technology or products to developers and utilities, which exposes them more to order cycles, but also frees them from the profitability ceiling a regulator imposes. Details on Nextpower's page and on TOYO's page.

The exception that proves the rule: water, not electricity

Only one company close to this broad utilities theme reaches 10 out of 10 in my screener: Consolidated Water (CWCO), a desalination operator supplying drinking water in the Caribbean, valued at 18.36 times its annual cash. I already gave it a full section in my article on unexpected 10-out-of-10 sectors, alongside a hotel REIT, a Mexican airport operator, and a premium cinema chain. So it is not that the word utility is incompatible with a perfect score. It is that water and electricity are two very different realities, even if the vocabulary files them under the same family.

A desalination concession serves a specific geographic area, with a local monopoly and inelastic demand: people do not cut back much on drinking water when the price rises slightly, unlike other goods. Once the facilities are built, they last a long time and their operating costs are predictable year after year. A national electric grid, by contrast, must continuously absorb an entire energy transition: new generation sources to connect, aging lines to replace, fast growing demand driven by electrification and data centers. The capex is never finished. That is what explains why the best regulated electric utility caps out at 7 out of 10 while a lesser known water company reaches the maximum.

What this means if you are looking at this sector

A score capped at 5, 6, or 7 out of 10 does not mean a stock is bad. It means the very structure of the sector, massive capex, profitability capped by regulation, limits the highest score achievable, even for the best performers. If you are looking for a quality electric utility, NextEra Energy and American Electric Power stand out with a more reasonable valuation than their peers. If you see a P/FCF of 166, 186, or 287 times, as with Dominion, Southern Company, or Exelon, understand that this is not necessarily a sign of a growth bet, but of free cash flow that is almost nonexistent once investments are paid for, with debt that will likely keep rising through the next capex cycles.

In solar, the valuation gap between Nextpower, 51.79 times, and TOYO, 13.44 times, for an identical score of 9 out of 10, shows that the market does not judge these two companies the same way despite comparable financial quality in my framework. That is exactly the kind of tension I look for before forming an opinion: comparable quality, very different price.

My approach, to close

I do not build this screener to tell you which sector to buy. I build it to compare, company by company, real financial quality, without relying on a sector's image, modern or not, defensive or not. That is how I realized water beats electricity, and that solar is improving faster than most people think. You can explore every sector on my screener, or read how I build each score on my methodology page.

FAQ

What exactly is a regulated utility?

It is a company that owns essential infrastructure, an electric grid or a water plant, and sells its service at a rate overseen by a public regulator, in exchange for a local monopoly. The regulator authorizes a return on invested capital, which caps the possible profitability, whether the company runs its network well or poorly.

Why isn't a P/FCF of 287 times, like Exelon's, necessarily a bad signal?

A high P/FCF means very little free cash is left relative to the stock price, often because capital spending is enormous that year. That is not the same thing as a stock judged too expensive for its future growth: it is more a signal that capex is eating up almost all the available cash, which deserves to be understood before judging the valuation.

Why does water score better than electricity if both are utilities?

Because the capex of a desalination plant is more predictable and more limited over time than a national electric grid in the middle of an energy transition. Water benefits from inelastic demand and a narrow geographic monopoly, without the massive, permanent investments regulated electricity must finance.

Is solar a better investment than regulated electricity?

That is not what my score alone says. Nextpower and TOYO earn a better financial quality score, 9 out of 10 versus 7 out of 10 at best for electric utilities, but their valuations vary widely, 51.79 times versus 13.44 times, and their business depends more on order cycles and renewable support policies. Quality and price remain two separate questions.

Does a score of 5 or 6 out of 10 mean you should avoid the stock?

No. It means the company does not check every one of my financial quality criteria at the maximum level, often because of high debt or free cash flow limited by heavy investment needs. That is only one side of my analysis, quality. Price, time horizon, and your own conviction about the sector matter just as much.

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About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).