AI investors are now turning to utilities for AI-fueling power players

Welcome back to POWER Launch, two inescapable truths of our AI future. We are going to need chips for those computers, are going to need electricity to power the computers. While NVIDIA is the clear winner so far in the chips race, many are still searching for the power players. And Pippa Stevens joins us now. Pippa. Hey, Tyler. Well, just how much power we're going to need remains to be seen, but it's clear there's going to be a whole lot of spending to upgrade the grid and that stocking interest in utilities, active managers exposure to utilities is out of 14 year high, according to the latest survey from by Bank of America. And for hedge funds specifically, relative exposure is at a record. And across all 11 sectors, hedge funds now have the highest relative exposure to utilities. Now to AI beneficiaries are independent power producers Constellation Energy and Vistra, both of which have seen an uptick in hedge fund ownership, according to B of A, which said more than 20% of large cap funds own at least one of the two names. Now. Both stocks are down sharply in the last month, but still up more than 80% on the year thanks to AI enthusiasm. The broader utility sector also pulling back from its recent high, but Matt Meili from Miller Tabak noting the XL U was at a key level where old resistance could become new support and if it holds, the sector could move higher. The key level to watch there is 6850. So, so how do these how does the fact that utilities are so tightly regulated play into the investment prospects of them? So couple of things to to note here. So utilities during COVID were actually trading at premiums, right, because they were interest rate substitutions. So once the Fed started raising rates, money moved away from utilities to say, hey, we can go buy bonds. And the valuation of the utilities actually became below market multiples. Now you've got the tailwind of, to your point, demand. And what they do is so, so the independent power producers are not regulated. So they can actually earn as much as they can because they can sell it out to the grid at whatever price there is. The regulated utilities have to keep on going back for the rate case, right? They can also make more money over time by selling it outside of the regulation. So that's where investors are focused on and kind of saying why do I want this? Now we like some of the utilities to be like AES and Edison. What you're getting there is 6 to 7% earnings growth and a three to 4% dividend yield. I will take 10 to 11% earnings growth at a cheaper valuation than the market because you get that. So that Elise, is kind of your or your more, I would say less volatile earnings in your portfolio. That's why I'm surprised, Pippa, that the valuations because our guest last hour also likes energies and notes. They're kind of undervalued historically speaking. And I am a little surprised at that with all of the hype around AI that hasn't translated in the utility sector trading at least above or at historical averages. Yeah, but I mean, they were under pressure. As Sarat said, there was a rotation out of the group. And in both 2022 and 2023, they underperformed and they were in the negative. And that was the first time in more than two decades when both had negative returns. And so I think there has been so much enthusiasm recently, but it also petered out in about May, mid-May or so. We've seen about it, I think an 8% decline since then. And I think that there's just, I mean, the reason why we've seen such mixed performance across the space, why why Constellation and Vista are up so much more is because they are Ipps. So as as Sirat said, their upside is limitless versus a regulated utility where they have to operate within the regulator and they have to bring their rate cases in order to get higher very quickly. How much capital spending to these companies have to do? I mean, like it's to the sky basically. Yeah. I mean, it's a lot, a lot to keep up. Well, there's the way it works is transmission lines, distribution lines. So it gets a little complicated in there, but they go back to the regulators for that. So just like you would think they could raise, they can't raise as much as they think they can. But then they can't really if if demand was low out if you remember a couple years ago during COVID and you know, all the industries weren't producing and some of the utilities were losing money. That's when they could still guarantee a certain amount, right? So to a floor. So you get capped. I mean, and that's why their argument is even if their profits are capped, their number of customers or the usage is expanding so much that you kind of get that delta. Yes, and that's where by the way, So what other unintended consequences come out of this? So as you know, I've always talked about copper, right? What are these companies doing building more? You need more copper for data centers. You need other things that are going to increase the demand for production and to to make all the equipment. And remember all of the spending was required even before AI and data centers blew up. That's really a a theme of this year, even last year, the last couple years, we've been talking about all these, all these great upgrades, all the hardening of the grid. It has to happen thanks to all of these record storms we're seeing and also load growth in EV data centers. The whole thing. It's, it's, it's a it's a conflation. All right, Pippa, thank you very much, Kel. Congress is starting to realize the importance of increased power generation. They're coming together on a bill to pave the way for more nuclear power. Emily Wilkins joining us with that side of the story. Emily, Hey, Kelly. Well, yeah, as you guys were just discussing, there is this need for more energy and as soon to be law, it's 1 presidential signature away from making it easier for advanced nuclear companies to build facilities in the US and provide a bump in electricity needed to power AI, to power electric vehicles, crypto and more. Now that's a bipartisan bill and it would basically help look to streamline the environmental reviews and processes. It would look to reduce fees and it could save companies potentially months of time and 10s of $1,000,000 in getting these advanced nuclear projects off the ground. About two dozen nuclear projects are currently being planned or considered in the US, according to the Nuclear Energy Institute, but only about two are actually under construction. One of them is Bill Gates. Terror power broke ground earlier this month on a nuclear power plant in Wyoming that plans to eventually create a smaller, cheaper reactor that can be sold across the country. Sarah Power President and CEO Chris Levak said governors are becoming worried that their states won't have enough electricity. We should be concerned about the electricity supply because, you know, we've been a little complacent in the last 30 years with the computing sector is now telling us, hey, AI is going to require a lot more electricity than we thought even, you know, a year or two ago. That's raising totally new concerns, very valid ones about how are we going to power these data centers. Electricity commit demand could increase as much as 3/4 by 2025, according to the US Energy Information Administration. And guys, I would not expect this to be the last bit of advanced nuclear legislation that we wind up seeing in Congress. All right, Emily, thank you very much. We appreciate the reporting.