Utility stocks have recently become leaders, gaining more than 4% over the past five days to close out their best week of the year.
The S&P 500 Utilities ETF (XLU) is up more than 12% year to date, a reversal from last year, when investors soured on the sector due to costly projects and high interest rates.
The prospect of lower rates later this year and increased long-term demand for electricity from artificial intelligence has made the defensive end of the market attractive, Wall Street analysts say.
“The excitement over AI has many investors looking for the next big thing after meteoric rallies in names like Nvidia (NVDA) and Super Micro Computer (SMCI),” said Adam Turnquist, chief technical strategist at LPL Financial, in a recent note.
Energy consumption is expected to increase significantly amid a boom in data center growth.
Additionally, the reshoring of manufacturing, which requires more energy for battery and chipmaking factories, and the proliferation of electric vehicle charging stations are expected to lead to an increase in energy demand.
“Electricity demand (in the United States) is increasing for the first time in 15 years,” Neil Kalton, senior equity analyst at Wells Fargo, told Yahoo Finance.
Energy of the constellations (CEG)
Constellation Energy is the largest owner of nuclear power plants in the USA. The Baltimore-based company has benefited from government efforts to transition to green energy and growing demand for electricity from data centers.
Constellation shares are up more than 85% year to date, with the company forecasting core earnings growth of at least 10% annually over the decade.
“This is absolutely a growth stock that has attracted growth investors,” Well Fargo’s Kalton said.
The analyst points out that Constellation produces electricity at around $25 per megawatt hour, while the government’s inflation reduction law allows a floor sales price of $45 per megawatt hour, providing a minimum margin of $20 per megawatt hour. megawatt hour.
“There’s no limit to the profits they can make,” Kalton said.
Wall Street is also optimistic that large technology companies will be able to build large-scale data centers with Constellation at their nuclear sites.
“The appeal of unregulated nuclear, which Constellation owns, is that you can build a data center on site land and just connect directly to the data power plant and take power,” Kalton said.
During the company’s earnings conference call, CEO Joseph Dominguez highlighted the massive amount of power hyperscalers will need.
“We will need data centers of much greater size and megawatt scale than what currently exists in the market,” Dominguez said.
“The data economy and Constellation nuclear power go together like peanut butter and jelly. And as such, we are in advanced conversations with several customers, large, well-known companies that you all know, to meet their needs,” he added.
Constellation has been operating as a standalone energy provider since 2022 after a spinoff from utility giant Exelon (EXC). The company has been buying back shares and recently increased its dividend ahead of its expected earnings on Thursday.
The stock has eight analyst recommendations of Buy, five of Hold and zero of Sell.
NextEra Energy (BORN)
The company, with a market capitalization of $147 billion, is one of the country’s largest electricity producers. While NextEra has a regulated utility in Florida, investors are more interested in its unregulated part of the business, NextEra Energy Resources, which involves developing renewable energy in the United States.
“Demand for renewable energy over the next five to 10 years is set to explode,” Kalton said.
NextEra forecasts annual profit growth of 6-8% through 2026.
The company’s CEO pointed to the exploding power needs of data centers and the relocation of manufacturing capacity to the United States as reasons for the increase in demand.
“The redomestication of industry in the United States, supported by public policy, will lead to an increased need for electricity,” CEO John Ketchum told analysts in April.
The stock is up about 20% year to date. The stock has 17 analyst recommendations of Buy, five of Hold and one of Sell.
Southern Company (SO)
Among regulated utilities, Southern Company has been one of the best performers in the utilities sector year to date, with shares up more than 10%.
The company has benefited from data centers it plans to build in the Georgia region, which represents higher electricity consumption.
Last year, Georgia Power, a subsidiary of Southern, opened the first nuclear power plant built from scratch in decades. Currently, four nuclear units are in service.
The Atlanta-based energy provider recently reported first-quarter earnings per share that were 14% higher than the same period last year. Data center sales increased more than 12% for the quarter compared to the same period in 2024.
“This is what history is about. These are the first new nuclear units built here in the United States in over 30 years and we are proud to be the company that brought this endeavor to fruition.” said Southern CEO Chris Womack. the company’s final earnings call.
Southern stocks are up 9% year to date. The stock has 11 analyst recommendations of Buy, seven of Hold and three of Sell.
Ines Ferre is a senior economics reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre.
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