The first half of the year is about to come to a close, and investors are still infatuated with giant tech stocks. Sure,
just had a brief correction. But it’s still the second-best performer in the
for both the second quarter and all of 2024, with a more than 150% gain.
leads the way for the full year and
is the best S&P stock for the second quarter.
and
are also among the top performers during the past three months.
But Nvidia and other big techs aren’t the only stocks riding the artificial intelligence wave. Check out two utilities.
has more than doubled this year.
has surged nearly 80%. Contrast that with the rest of the sector. The Dow Jones Utility Average is only up about 2% this year.
Both Vistra and Constellation have gotten an AI boost because they own nuclear power plants, which are key to fueling the intense energy demands required by massive server farms. Unlike coal or natural gas, nuclear power generates electricity without producing global warming emissions.
The companies are expected to report stellar earnings growth this year as a result, with analysts forecasting a nearly 40% increase for Vistra and 55% surge for Constellation Energy. That’s significantly higher than the expected profit growth for many other utilities, which up until recently had been viewed more as safe havens and bond proxies due to their high dividend yields.
Other top utilities, such as
Southern
Co.
and
still fit that bill. They pay dividends that yield in a range of 3.7% for Southern to 5.4% for Dominion. Vistra and Constellation, by way of contrast, have yields below 1%, mostly because their stock prices have surged so dramatically. The yield is the annual dividend divided by the share price.
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That’s created a bit of a dilemma. Mutual fund and hedge-fund managers and other institutional investors now feel they have to own Vistra and Constellation so they can keep up with their benchmarks. Data from BofA Securities shows that more than 20% of large-cap funds own at least one of the top utility stocks as of late May compared with only 13% at the start of the year. And hedge fund ownership of utility stocks is at its highest level since 2011.
Can the momentum for these two stocks continue? UBS analysts said in a recent report about Constellation that “we do not think the fundamental backdrop has deteriorated” and that “increasing electric demand from data centers” is likely.
The problem though is that this may be more than reflected in the stock price. Shares of Constellation now trade for more than 27 times 2024 earnings estimates, compared with a P/E of just 17.5 for the Utilities Select Sector SPDR exchange-traded fund. Vistra, on the other hand, is valued at 17 times forecasts—a slight discount to its peers.
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So Vistra might have a little more room to run than Constellation, which is starting to look frothy. To that end, Constellation shares tumbled more than 5% Wednesday as bond yields rose. Vistra fell nearly 4% as well. Both companies will need to continue to generate strong earnings growth to justify why their stocks should outperform their peers by such a wide margin. Otherwise, there could be a painful reversion to the mean.
Write to Paul R. La Monica at paul.lamonica@barrons.com
