The Next Big Growth Sector

4 min read

Dear Reader,

Welcome back to our latest edition of Market Insights with Sanjeev Kaushik.

In this edition, we uncover why utilities sector are emerging as a surprising source of growth for investors.

Additionally, we bring you our ultimate guide to call and put options to enhance your trading strategies.

So let’s dive right into it..

Today at a glance:

• Could Utilities Be the Next Big Growth Story?
• Learn Fundamental Analysis with Sanjeev Kaushik
• The Ultimate Guide to Options Trading

Why Investors Should Consider Utilities for Growth?

A summer heat wave isn’t the only reason for the expected rise in electricity demand. The growing influence of artificial intelligence and its substantial energy needs are increasing the earnings potential for utility companies.

According to Caroline Randall, portfolio manager for The Income Fund of America, investors are beginning to focus on utilities as a possible growth sector. “I view the electricity network companies as the silent giants of the energy transition. We’ve reached a pivotal point where companies will need to invest more heavily in the United States electric grid, which should increase their earnings and dividend potential,” she said.

Earnings expectations have jumped for utilities (Source: Capital Ideas)

Traditionally known for their steady dividends, utilities are now catching the eye of growth investors. Let’s see why!

Ageing electric grid needs an overhaul

With much of the U.S. electric grid dating back to the 1950s and 1960s, an update is overdue. Taylor Hinshaw, portfolio manager for SMALLCAP World Fund, said that a significant portion of electricity is produced from natural gas and coal, many of which will be phased out or replaced over the next 20 to 30 years.

The system is also under strain from wildfires and floods, as Pacific Gas & Electric and Southern California Edison work to fortify their networks against disasters and secure clean energy sources to meet emission standards.

Even without the expected rise in power demand, increased capital expenditure is crucial. Hinshaw estimates that power demand will grow by 3.5% annually over the next decade, up from the current rate of about 1.0%. This investment can lead to earnings growth as regulators permit companies to recover their costs through rate increases.

The shift toward renewable energy is already in progress, despite ongoing debates about fossil fuels versus renewables. The Inflation Reduction Act of 2022 provides substantial incentives for clean energy, benefiting states across the political spectrum.

Utilities analyst Andre Meade believes that while certain aspects of the law might change with a new administration, the trend toward investing in renewables will continue.

Utilities Enabling the AI Growth

It’s well-known that AI requires substantial amounts of electricity. For instance, a single query to ChatGPT consumes as much energy as keeping a light bulb on for 20 minutes, according to the Allen Institute’s July 2024 research.

Data centers jolt demand for electricity (Source: Capital Ideas)

Tech companies are increasingly managing their own energy needs. For example, Amazon recently acquired a 960-megawatt data center campus from Talen Energy for $650 million and plans to source power from Talen’s nearby nuclear plant. Stocks for companies involved in nuclear energy have surged, with Constellation Energy’s shares rising nearly 50% year-to-date as of July 24, compared to the S&P 500 Index’s return of about 14%.

In a similar move, Dominion Energy is developing an offshore wind farm costing between $10.3 billion and $11.3 billion to address rising demand and meet emissions regulations. Dominion currently supplies electricity to many data centers across the U.S., particularly in northern Virginia’s “data center alley,” with California trailing as a secondary hub and other regions such as the Southeast, Texas, Ohio, and Arizona also planning data center facilities.

It is anticipated that regulators will encourage companies to expand capacity, akin to Dominion’s offshore wind project, due to the potential strain on electricity supply from the growing number of data centers. Concerns about grid reliability are already being raised as critical infrastructure is increasingly utilized during peak electricity demand.

Expanding capacity involves risks, particularly if demand falls short of projections.

Reshoring Drives Up Energy Needs

In response to pandemic-related disruptions and geopolitical uncertainties, many companies are reshoring, or relocating manufacturing back to the United States. This shift is driven by the need to strengthen supply chains and enhance local economic impacts through high-quality manufacturing jobs.

Industries with high energy needs, such as semiconductors, pharmaceuticals, and automotive, are leading the reshoring movement. For instance, Intel is set to launch its U.S. foundry with support from the CHIPS and Science Act, aimed at boosting domestic semiconductor production.

Companies are also becoming more strategic in their planning, factoring in potential factory closures, labor shortages, and other risks. Many are diversifying their supply chains and aiming to reduce reliance on countries with high import tariffs, like China.

The Ultimate Guide to Call and Put Options

Want a sneak peak of our upcoming in-person event? Watch our in-depth video guide

Dive into the essentials of call and put options, explore the differences between American and European options, and understand delivery versus cash settlement.

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