Utility stocks have become leaders recently, gaining more than 4% over the past five days, capping off the 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 expensive projects and high interest rates.
The prospects of lower rates later this year and increased long-term electricity demand from artificial intelligence have made the defensive part of the market look attractive, according to Wall Street analysts.
“The excitement around AI has many investors looking for the next big thing following meteoric rises from names like Nvidia (NVDA) and Super Micro Computer (SMCI),” said Adam Turnquist, chief technical strategist at LPL Financial, in recent note.
Energy consumption is expected to increase dramatically amid a boom in data center growth.
Furthermore, the relocation of the manufacturing industry, which requires more energy for battery factories and chip factories, and the proliferation of charging stations for electric vehicles are expected to drive an increase in energy demand.
“Energy requirement [in the US] for the first time in 15 years it’s actually growing,” Wells Fargo senior equity analyst Neil Kalton told Yahoo Finance.
Constellation Energy (CEG)
Constellation Energy is the largest owner of nuclear power plants in the US The Baltimore-based company has been a beneficiary of the government’s push to transition to green energy and growing demand for power from data centers.
Constellation shares are up more than 85% year-to-date as the company expects core earnings to grow at least 10% annually over the decade.
“It’s absolutely a growth stock and has attracted growth investors,” said Well Fargo’s Kalton.
The analyst highlights that Constellation produces power at about $25 per megawatt-hour, while the government’s Inflation Reduction Act allows a minimum selling price of $45 per megawatt-hour, providing a minimum margin of $ 20 per megawatt-hour.
“There is no limit to the profits they can make,” Kalton said.
Wall Street is also optimistic that big tech companies will build large-scale Constellation data centers at their nuclear facilities.
“The appeal of unregulated nuclear power, which Constellation owns, is that you can build a data center on site and just plug directly into the data power plant and get power,” Kalton said.
During the company’s earnings call, CEO Joseph Dominguez highlighted the enormous amount of power that hyperscalers will require.
“We will need data centers with a size and dimension from a megawatt perspective that go far beyond what currently exists on the market,” said Dominguez.
“Constellation’s data economy and 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, about how to meet their needs,” she added.
Constellation has operated as an autonomous energy provider since 2022, following a spin-off from utility giant Exelon (EXC). The company has been repurchasing shares and recently raised its dividend ahead of earnings expected on Thursday.
The stock has eight analyst recommendations to buy, five to hold and zero to sell.
NextEra Energy (NO)
The company with a market value of US$147 billion is one of the largest electricity generators in the country. Although NextEra has a regulated utility in Florida, investors are more interested in its unregulated part of the business, NextEra Energy Resources, which involves the development of renewable energy in the US.
“The demand for renewable energy in the next five to 10 years will explode,” Kalton said.
NextEra forecasts annual earnings growth of 6% to 8% through 2026.
The company’s CEO highlighted the boom in data center power needs and the transfer of production capabilities to the US as reasons for the increase in demand.
“The policy-supported redomestication of U.S. industry will drive the need for more electricity,” CEO John Ketchum told analysts in April.
The stock is up about 20% year to date. The stock has 17 analyst recommendations to buy, five to hold and one to sell.
Southern Company (THEN)
Among regulated utilities, Southern Company is one of the best performers in the utility sector year-to-date, with shares up more than 10%.
The company benefited from the data centers it intends to build in the Georgia area, which represents greater electricity consumption.
Last year, Southern subsidiary Georgia Power debuted the first nuclear reactor plant built from scratch in decades. Currently four nuclear units are in operation.
The Atlanta-based energy provider recently reported first-quarter earnings per share that were 14% higher than the same period last year. Sales to data centers increased more than 12% in the quarter compared to the same period in 2024.
“This is what making history looks like. These are the first new nuclear units built from scratch here in the United States in over 30 years and we are proud to be the company that saw it happen,” said Southern CEO Chris Womack, during the company’s last earnings call.
Southern shares are up 9% year to date. The stock has 11 analyst recommendations to buy, seven to hold and three to sell.
Ines Ferre is a senior business reporter at Yahoo Finance. Follow her on Twitter at @ines_ferre.
