AI-boom has advisors looking for power plays

More and more advisors are looking for a power play.

The top sector of the S&P 500 so far this year is utilities with the Utilities Select Sector SPDR ETF (Ticker: XLU) up over 19 percent year-to-date. The group has enjoyed a great run since the start of the summer because AI “factories” and Bitcoin “manufacturers” require a whole lot of juice to make, well, whatever it is they make. 

Kevin Mahn, chief investment officer at Hennion & Walsh, for example, sees power generators like Southern Company (Ticker: SO) as a “backdoor play” into the AI revolution.

“They provide electrical and natural gas utilities in Southern California and also in parts of Texas,” said Mahn. “But guess what? Their customers are individuals, companies, and data centers. These data centers can't manufacture their own electricity, at least not yet. So they're going to have to draw down from the electricity that's available through their local utilities.”

Adding to the attraction of old school utilities is their traditionally high dividend yield, a trait Mahn sees growing even more attractive as the Federal Reserve starts cutting interest rates. Southern Company’s dividend yield, for instance, is 3.22 percent. Not a bad kicker for a company whose shares are already up 26 percent so far in 2024.

Josh Duitz, portfolio manager at abrdn, meanwhile, is digging into infrastructure investments as an avenue – or perhaps a highway - into this dual AI slash energy bull market.

“If you look back historically when we had the Industrial Revolution, it was underpinned by infrastructure, notably the railways. The car proliferation in the early 1900s was underpinned by road development,” said Duitz. “Today with artificial intelligence, it's being underpinned by energy infrastructure. We think there's great opportunities for data driven infrastructure, or in other words, towers and emerging markets.”

Along these lines, Duitz sees a pair of “mega-themes” converging: energy transition and power usage. He points out that power usage in the US over the past 20 years has grown less than 1 percent a year, while in Europe it's declined by about 10 percent. As a result, both regions need more power because of offshoring and EV transition. And at the center of all this, says Duitz, is the demand and use of GPUs or graphic processing units, which are the prime ingredients for AI creation.

“High performance computing and machine learning and uses about 3 to 4 times as much energy as CPUs use. That means we need more and more energy,” said Duitz.

The growth of American cities is also a major theme for Duitz when it comes to his AI infrastructure play. He points out that the world's population has doubled over the past 50 years, while the number of people living in cities has tripled over that time. It’s a demographic and population shift he expects to continue – and in emerging markets as well.

“We're all using our iPads to communicate, and Zoom, and people are working from home. The data economy is growing about 30 to 40 percent in Africa,” said Duitz. “You need infrastructure to support it. You need cell towers there. Because of urbanization all those people are going to need utilities. They are going to need subways and roads. And infrastructure is really the core of that.”

Marcus McGregor, managing director at Conning, is another power player, but he is looking to natural gas producers and transporters like Chesapeake (Ticker: CHK), Range Resources (Ticker: RRC) and Kinder Morgan (Ticker: KMI) as pipelines to profits from the growing data center market.

“Between the US and Canada we have about 100 years of supply. We've already been building our infrastructure over the years, natural gas prices have come down considerably. But we believe that AI will have a modest impact on natural gas demand,” said McGregor. “Listening to second quarter earnings calls from major pipeline companies and producers, they seem to think that between 3 to 10 BCF a day will be the incremental growth we'll see from AI data center demand over time.” 

Finally, as for the impact of the Presidential election on the power sector, McGregor believes both sides offer a bullish tailwind for the energy sector.

“We see with a Republican candidate less regulatory hurdles for a lot of pipeline companies. And you also have the Inflation Reduction Act by the Democrats. We expect that to help EV demand,” said McGregor.