U.S. water stocks are losing their luster? Several stocks were downgraded by Wells Fargo

Wells Fargo recently released a report on the rating adjustment of US water stocks in 2025. Based on recent market dynamics, updates on company information, and changes in the macro environment, Wells Fargo lowered the target price of multiple stocks.

Specifically, Wells Fargo raised the rating of California Water Service Group (CWT.US) from "Hold" to "Overweight", with the target price lowered from US$56 to US$52;

Wells Fargo raised the rating of American Water Works (AWK.US) from "Sell" to "Hold", with the target price lowered from US$133 to US$129;

Wells Fargo lowered the rating of American Water Works (AWR.US) from "Hold" to "Sell", with the target price lowered from US$84 to US$77;

Wells Fargo lowered the rating of Essential Utilities (WTRG.US) from "Overweight" to "Hold", with the target price lowered from US$43 to US$39;

Wells Fargo maintained the "Hold" rating for SJW Group (SJW.US), with the target price lowered from US$61 to US$53.

Looking back at 2024, the US water industry faced many challenges. The median return of water companies as a whole was -12%, far lower than the median return of about 16% of regulated electricity and gas companies. The rise in interest rates at the beginning of 2024 and the recent concerns about long-term high interest rates have created headwinds for the high P/E water subsector. In addition, the lack of AI/data center business layout has dampened investor interest in the sector.

The water stocks fell in 2024, and the P/E of electricity stocks grew significantly (benefiting from the long-term strong trend of electricity demand/data centers), making the premium of water stocks relative to electricity stocks fall from 50-55% at the beginning of 2024 to 15-20%, the lowest level since the end of 2017. The high growth rate (6-8%) of water companies is often mentioned as one of the reasons for the premium. Now, this advantage has been offset. Most electricity companies have similar growth prospects in the next decade.