Morgan Stanley says the time is right for steady utilities stocks. These are the firm's favorites

Published Wed, Mar 23 202212:58 PM EDTUpdated Wed, Mar 23 20224:07 PM EDT

As investors seek safety in uncertain markets, Morgan Stanley has issued a series of U.S. utility stocks it considers favorites. The investment bank upgraded the utilities sector this week to overweight from neutral, saying utility stocks can still "provide good relative outperformance" for investors seeking lower volatility and stable dividends. The Dow Jones Utility Average on Tuesday closed at 989.71, just shy of all-time records reached earlier this month. Analyst Stephen C. Byrd issued a list of top utilities picks on Wednesday, choosing companies that have the lowest risk, greatest upside, best outlook for long-term clean energy growth, and greatest catalysts. "These are Overweight-rated utility stocks that offer strong execution of capex plans, above-avg. growth plans, and lower risk due to business simplification and geography," Byrd wrote. Here are six utility stocks Morgan Stanley considers its favorites: American Electric Power : The electric utility firm is closing costly coal plants and expanding into renewables, following the lead of top utilities in the Midwest. The firm is expected to grow its earnings in line with its peers, but its stock price is trading below the level of some of its competitors. American Electric Power was issued a $112 price target, which reflects 18% upside. Atmos : The firm considers Atmos the "best-in-class" natural gas utility. The company has the highest growth and the best balance sheet among its peers, but trades at a similar level, Morgan Stanley found. Analysts gave Atmos a $128 price target, offering 11% upside potential. CenterPoint Energy : Analysts consider CenterPoint Energy a "premium utility," saying the firm's management team is expanding its capital expenditures budget for the next five and 10 years. The company is expected to divest its stake in natural gas and pipeline firm Energy Transfer this year. "The stock trades at a 3% premium to peers, which is too low in our view and could expand to 10% given better growth, excellent business quality, and earnings upside," Byrd said. CenterPoint Energy's $31 price target reflects 5% upside. DTE Energy : Morgan Stanley highlighted the company's "above-average" growth profile and a possible acceleration of its transition away from coal. DTE Energy was issued a $133 price target, offering 5% possible upside. Exelon : Analysts called Exelon an "under-appreciated" story after the utility company separated its merchant power business, which made it a "big hit" with environmental, social, and governance (ESG) investors. Exelon's $50 price target offers investors 15% upside potential. FirstEnergy : Byrd called FirstEnergy a "rehabilitation story," saying the firm's troubles are likely behind it after FirstEnergy settled in a federal investigation in Ohio last year. FirstEnergy was issued a $50 price target, offering 15% upside potential. — CNBC's Michael Bloom contributed to this report.

Nick Akins, Chairman, President and CEO of American Electric Power.

Adam Jeffery | CNBC

As investors seek safety in uncertain markets, Morgan Stanley has issued a series of U.S. utility stocks it considers favorites.