The utilities sector has outperformed this year, closing its best May since 2003. KeyBanc Capital Markets Equity Research Analyst Sophie Karp and eToro US Investment and Options Analyst Bret Kenwell join Market Domination to discuss how to navigate the sector.
Karp says she is bullish on the utility space, claiming that it is “selling the shovels” the AI “gold rush” requires. She also notes that the sector has defensive characteristics because of its non-cyclical nature and underscores the fact that it is historically inexpensive. She adds that utilities are still attractively valued: “The trend is real,” she says, pointing to the strength of power prices.
Kenwell explains that while utility companies may need to make large capital investments to meet the AI-fueled demand coming onto the grid, earnings expectations are still strong for the sector’s leaders.
For more expert insight and the latest market action, click here to watch this full episode of Market Domination.
This article was written by Gabriel Roy
Video Transcript
The utility sector outperforming so far this year closing out its best May since 2003.
But for investors looking into the defensive sector, traders may find a fresh perspective of opportunity with utilities.
We’re looking at how to navigate the big picture with the Yahoo finance playbook, Brent Kwell, E Toro us investment and options analysts, along with Sophie Karp, key Bank, capital markets, equity research analyst.
Joining us now to discuss.
Welcome to you both and Sophie, I, I’ll start with you.
We’re actually Sophie uh the start of the show, we were talking to Michael Krowitz uh from Piper who likes utilities and we’re asking why and, and he, he referred to them as sort of the uh the iron man of the stock market.
Sophie in that, in the sense that you kinda, you’re kinda playing offense and defense.
When you, when you’re in the utilities, you agree with that, Sophie.
Oh Thank you for having me and uh well, I obviously like to do is uh we are bullish on the space and we have been bullish since the start of the year and never from before.
Um the start of the year and I think with the A I rush sort of emerging here, um I, I would refer to it as, you know, uh we have this gold rush and utilities.
Uh power companies are the ones who are selling shovels to, into this gold rush.
And so I think it’s an excellent one to get exposure to this trend, of course.
Uh And it’s a, it’s a way that also offers defensive um uh characteristics because of the nature of this uh non cyclical nature of uh of this sector.
And um you know, so and it’s historically, still inexpensive relative to where utility is historically traded uh versus uh bond yields and versus the I find it as well well, and kind of to Sophie’s Point.
Brett, what’s interesting here is, you know, as the market more broadly has come to this hire for longer realization, normally, that would not necessarily be a great recipe for utility stocks, right?
But because there is this alternative narrative now about A I, they have been supported in a time when maybe they wouldn’t otherwise have been.
Right.
Yeah, I believe that there seems to be a a sort of um multi catalyst approach to utilities at the moment.
They, they are typically a more defensive sector.
But um right now we have the A I uh catalyst helping to fuel the recent gains.
And, and while the idea of interest rates or at least lower interest rates have been pushed back I think investors still have that on the front of their minds.
And when you look out over the next say 6 to 12 months, um the expectation is pretty clearly that the fed will be cutting interest rates and, and between that and, and A I, that’s, it’s a kind of a unique catalyst I think for utilities and it’s, it’s part of the reason why it’s performed so well this year.
So if I bring back to you, you know, we’ve had a number of, of strategists.
So if you come on the show and pat on the table for utilities, you know, it’s not a new theme and, and investors have bid, bid them up broadly.
When you look at this at the sector, Sophie, do you consider it still, you know, attractively valued here?
Yeah, we do.
Uh I think, you know, when we look at the valuation of benchmarks where the sector trades uh versus the S and P 500 versus um bond bond yields, like I mentioned, I think it’s still historically inexpensive.
Uh It’s outperforming now, but uh look at the slightly longer chart and we come and I file like a year or two of underperformance versus all the major indexes.
Uh when the cyclicals were, were outperforming and utilities were essentially, you know, flat down.
So, uh in my, we’re just in the beginning of this uh reset for the space and the trend is real like it’s, it’s not it’s, it’s visible in the power prices where there’s where this merchant market for power.
Uh power prices are at levels we have not seen in a very long time for the first time in like a couple of decades.
Probably we’re seeing actual growth in power demand in the U SI.
Think it’s, it’s a really big change.
It kind of shocked people into realizing that the space has a lot, a lot of potential.
I guess my big question when it comes to that increased demand and Brett, I’ll take this one to you is whether the power companies can meet that demand, you know, especially if it continues to go up because of these data centers, for example, can the grid take it?
Are these companies going to need to make big new capital investments in order to keep up, they may need to?
But back, I’m back to Sophie’s Point.
I think that the group is still, even though it’s had a big run, it’s still attractively valued.
And even though it’s, it’s, we’ve had sort of this giant rally, whether you look back over the last few weeks or you look back, you know, year to date or even all the way back to, you know, back to November.
Um even though some of those catalysts might, might require more investment from those groups, um the the earnings expectations are still pretty strong and the valuation hasn’t gotten, um, you know, out of control for especially compared to where it has been over the last few years.
And so I think when you look at sort of the, the bigger picture for utilities, it still remains attractive, even with all of those considerations at hand.
And, and Sophie, it’s a good question.
So I want to get your take too, whether power companies can meet this demand, just given A I crypto EVs.
What do you think?
Sophie?
Yeah.
And I think that’s for sure they can, right.
Uh It’s just a matter of uh how well aligned the timing of that is going to be with the uh uh how fast the uh A I and the industry wants it.
And I’m not sure what uh the tech guys are projecting here, but uh it’s possible to build generation relatively quickly in certain places in the US.
And I think like it’s, it takes probably a couple of years to build a gas plant, it takes couple of years to build a solar or wind plant.
Um And uh we see a lot of and because eu is not a centralized, we kind of see that naturally uh tech customers are gravitating towards the places where there is capacity right now.
Uh And so we are not actually seeing uh you know, right now a situation where power demand is not being met.
So there are different places in the country where there is capacity available and there are some places that are more tight.
Right.
So for example, not Virginia, that’s been a data center, you know, uh a haven for, for a very long time.
They may have to wait longer if they want to interconnect there.
But um anywhere in the, in the country like in other regions that can be accomplished faster and hope we see that its customers spread out and, and Sophie just quickly before we leave, you are there particular uh utilities that you think are best positioned either because of where they’re located or you know, their cost of, of, of power, for example.
Yeah, I think they definitely um uh it doesn’t, the customers tend to triangulate like they want cheap land, they want uh affordable power, they want time to market.
And from that standpoint, we would flag as the southeast of the US and they also want access to fiber, right?
So when you overlay all these factors, you, you have advantage in sort of the Southeast and we will flag Georgia potentially uh other southeastern locations, right?
So that would be Southern company that benefits from that and we would flag like middle of the country where one of the largest public traded publicly traded companies is Excel Energy XCL.
So that’s another area where uh we see potentially uh influx of data centers.
Um And of course, the usual suspects Dominion energy who resources Northern Virginia territory.
Sophie Brett, great discussion.
Appreciate your time.
Thank you.