As an energy investor, I am sure you are aware of the expected impact of the AI boom. The servers that AI platforms require demand enormous amounts of power. That, along with expected demand increases from the continued growth of EVs, has made companies with electricity generation power some of the trendiest stocks over the last couple of years. However, those producers can only meet the increased demand if there is significant investment in the infrastructure of electricity generation and transfer, so what about stocks in that industry?
Well, they haven’t been left behind.
Most of the big players in electricity infrastructure have posted big gains in their stock prices over the last year or so. However, more recently many have pulled back from their highs. So, has that created an opportunity, or does it just represent a retreat to more realistic levels after those stocks climbed too high?
To some extent, the answer to that question depends on how you view the predictions for growth in electricity demand. Are those predictions massively overdone, are they about right, or could they even be underestimated?
US electricity demand has been pretty flat for around two decades, but as the aforementioned factors began to kick in last year, it started to increase. Considering the amount of hype around the subject, the increase so far has been fairly unimpressive at around 3% per year. But the rate of increase is set to grow, which, combined with the compounding…
As an energy investor, I am sure you are aware of the expected impact of the AI boom. The servers that AI platforms require demand enormous amounts of power. That, along with expected demand increases from the continued growth of EVs, has made companies with electricity generation power some of the trendiest stocks over the last couple of years. However, those producers can only meet the increased demand if there is significant investment in the infrastructure of electricity generation and transfer, so what about stocks in that industry?
Well, they haven’t been left behind.
Most of the big players in electricity infrastructure have posted big gains in their stock prices over the last year or so. However, more recently many have pulled back from their highs. So, has that created an opportunity, or does it just represent a retreat to more realistic levels after those stocks climbed too high?
To some extent, the answer to that question depends on how you view the predictions for growth in electricity demand. Are those predictions massively overdone, are they about right, or could they even be underestimated?
US electricity demand has been pretty flat for around two decades, but as the aforementioned factors began to kick in last year, it started to increase. Considering the amount of hype around the subject, the increase so far has been fairly unimpressive at around 3% per year. But the rate of increase is set to grow, which, combined with the compounding effect of growth on growth, will soon necessitate massive investment in electricity infrastructure throughout the country.
Given that and based on the rate of adoption of AI by both businesses and households in America, I am inclined to believe that despite the often breathless nature of some claims around the upcoming surge in demand, most predictions are more likely to be too conservative than they are to be exaggerated. Therefore, even after the big gains shown in the last couple of years, stocks in the electricity infrastructure industry should have a lot further to go, making the recent pullback an opportunity for investors.
The next question, as always, is how best to play that.
The most conservative option would be the ALPS Electrification Infrastructure ETF (ELFY: Chart Above). ETFs spread the risk in an investment like this, but while that offers some degree of safety, it also limits the upside, as evidenced by the fact that over the last year, ELFY has gained “only” around 30%, even as many of the individual stocks in the industry have posted much better gains than that. For that reason, while ELFY can form the basis of an investment like this, attempting to juice the returns by holding a couple of individual stocks makes sense here.
The top 5 Electrification infrastructure stocks in the US are Eaton Corporation (NYSE: ETN), Quanta Services (NYSE: PWR), Emcor Group (NYSE: EME), GE Vernova (NYSE: GEV), and Powell Industries (NASDAQ: POWL). For the purposes of this investment, I am discounting GEV because it is maybe a little bit TOO diversified.
None of the others have basic valuation metrics that exactly scream value, which is hardly surprising given that they have been bought in anticipation of growth rather than based on what they have done so far. The best from that perspective is probably EME, with trailing and forward P/Es of around 25. That, however, is not without reason. They have been slow to take advantage of the potential here, which has held the stock back a bit when compared to others in the industry. Still, I like traditional value, so, on the basis that a rising tide lifts all boats and given that EME is now starting to invest for growth, they would be one of my picks.
The other would be at the other end of the spectrum. Quanta has been aggressively pursuing growth and has a large order backlog to show for it. That will enable it to ride out short-term economic turbulence should it come and helps to explain why it has an average-looking PEG ratio, even with a trailing P/E of 88.
Whether you like that particular strategy or not, investing in electrification infrastructure on this recent small pullback looks like a good idea. I am not usually one for trades that are already well underway, but I will make an exception in this case. Electricity demand looks sure to climb over the next decade or so, and while there has been some buying of industry stocks to reflect that, the likelihood is that this is just the beginning and more significant gains lie ahead.