A New Growth Sector for Explosive Gains? by Adam Khoo

Transcript

00:00

So, traditionally, it's been technology and consumer discretionary stocks that have been the growth engine of stock markets, especially the US stock markets. But recently, there's been a brand new sector that has emerged as a new growth sector.

What is this and is

00:15

there a lot of profit potential? Let's take a closer look.

[Music] Now, as many of you would know, the US

00:30

market is divided into 11 sectors. You've got, for example, the technology sector, the financial sector, the consumer discretionary sector, the energy sector, and so forth.

And of all those sectors, the most one of the most boring sectors that I never invest in

00:46

historically has been the utility sector or utility stocks. Why?

Because utility stocks are basically companies that provide essential public services like electricity, natural gas and water. And historically for the last 20, 30, 40

01:02

years, it has been one of the lowest growth sectors. Why?

Well, because typically electricity demand grows at 0% to 1% perom, right? So, how much can these companies grow if the demand is

01:18

growing at at 1%. At the same time, many of these utility companies, their prices are set by regulators.

So, they can't just raise prices if they want to. It is set by the government.

And as a result,

01:33

uh the stocks grow at a very slow and steady pace. And historically, people tend to buy them just for dividends, not for growth.

and also to kind of like recession proof the portfolio because typically utility stocks are very defensive in in the in a worst recession

01:50

you still need electricity you still need water you still need uh gas right so for example if you take a look at the utility ETF uh ticker symbol XLU you can see again historically the last 10 years it underperforms

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the S&P 500 so as an investor if your job is to beat the S&P 500. Why would you want to buy a sector that can never outperform the S&P 500?

Yeah. So, what kind of stocks are in the utility sector?

Well, if you take a look at the

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XLU ETF, you can see their largest holdings are over here. You've got examples uh Next Terra Energy, Constellation Energy, Southern Company, Duke Energy, American Electric Power, Seer, Vistra, Dominion Energy, just to name a few.

However, recently something

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uh has changed, right? Suddenly this sector, well, not the whole sector, but certain companies in the sector, they've become really exciting.

They've become like growth stocks. So, for example, if you look at some of these utility stocks like uh Talon Energy, ticker symbol TLN,

02:58

Vistra COP, ticker symbol VST, uh Constellation Energy, ticker symbol CEG, and NRG Energy ticker symbol NRG. In the last one, two years, they have way outperformed the S&P 500.

You can see the S&P 500 up 46%.

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In the last uh two years or so, but these companies up 500%, 300%. What the heck is going on?

Now, first of all, some of you would say, but aren't these energy companies? Isn't this under the energy

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uh sector? No, these are not energy companies.

These are utility companies. So what's the difference?

Now in the financial world, energy companies refer to companies like Exxon Mobile, like

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Shell, like Chevron where their main uh business is actually in extraction of oil and natural gas. So their output would be oil and natural gas wi-i which are very very cyclical.

Whereas these companies their output is not oil and

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natural gas. their output is electricity.

So yeah, they use nuclear energy, they use uh oil as their input but their output is electricity. So they are utility companies.

They are not energy companies as defined in the financial world. So just to clarify that

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right and as a result of some of these uh high growth in these utility stocks you can see that the overall utility sector has grown at 16.73% in the last uh year which is pretty

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interesting because historically it's been again the lowest growth but now is beginning to grow at double digits. So what has changed what what happened to this entire sector?

What happened to these utility companies? What changed?

AI, right? The AI revolution.

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So, while everyone is looking at semiconductor chips, they're looking at uh AI stocks like Palanteer, but at the same time, these utility companies are benefiting from the AI revolution as well as electrification in general. Why?

Because remember that

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AI requires data centers and these data centers require a tremendous amount of power and electricity. So in fact global data center electricity is projected to double to 945

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terowatt by 2030 which is a growth of 15% a year. So think about it right historically power has increased or rather electricity has increased at 1% a year but now it's going to be 15% a year because of the demands of

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electrification as well as AI and again we at the early stages of this entire AI revolution robotics automation all these tremendous amount of power now the question that I ask and the question you have to ask is this sudden growth in

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these utility stocks right the demand for power is it cyclical which means does it just grow shortterm and then mean reverts to the longerterm trend which is slow growth or is this a structural change is this an increase that can be sustained for the next 10 20

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years that that's the question so what I think and from my research it appears that this is a structural long-term change and not a short-term cyclical change why there are three main tailwinds that are driving the demand

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for electricity. Number one, I mentioned AI data centers.

So, inference, enterprise AI adoption, cloud migration can keep data center demand for electricity growing for a long time, 10, 20, 30, 40 years, and you only get even

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more in the future. The second tailwind is electrification stacks on top of AI.

For example, electric vehicles. As more and more um uh vehicles go electric in the future, you need more electricity, right?

Heat pumps as well as industrial

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electrification in many regions of the world. And the third specifically to the US is domestic manufacturing.

As all of you know, uh the Trump administration is getting factories to come back to the US uh and to get companies like even TSMC

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uh Taiwan semiconductor to um uh manufacture semiconductors in the US. So we call this reshoring of factories to the US and this increases the demand for electricity.

Now in case you're wondering how much is 1 terowatt hour while one terowatt hour is equal to

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1,000 gigawatt. Remember back to the future when Doc Brown said I need 1.21 gigawatt to send you back to the future.

So this is 1 terowatt is 1,000 gigawatt. Okay.

And one terowatt hour is required

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to run a 100 million homes uh for an hour. That's how big it is.

And you can see that the projected data center usage just data center alone is 945 terowatt hours. That that's a tremendous amount of power right now.

But are we just

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going to go out there and buy utility companies? No.

Yeah. So bear in mind that utility stocks there are two types of utility stocks.

You've got traditional regulated utility companies and these are the ones where the profit margins and their pricing is regulated.

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They can't raise prices as and when they want is regulated by the government the state government. So companies like next next era energy tal NE uh we have got companies like Southern Company tal so

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Duke Energy DUK and SRA sur these companies um they can't raise prices their profit margins are fixed so they will continue to be low growth companies so these are the ones that I would not want to invest in unless I just want to

09:00

get dividends right but if I want to invest for growth I want a look at only the IPs which are the independent power producers within the utility sector. So what's the difference?

The difference is IPs they own uh their own power plants

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obviously and they sell electricity at market rates which are unregulated. The state the government cannot control the rates they set.

they can sell at whatever price they want. And these and when data centers uh run by Meta or Amazon or or or Microsoft Azure when

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they're desperate for 247 power, these companies have massive pricing power. They can raise their price and these uh big hyperscalers and data centers are willing to pay anything to get the power.

And many of these IPs, they own the

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existing nuclear power that AI data centers crave because nuclear power as you guys know is the only form of power that is constant and uninterrupted as compared to other forms of power like like solar for example, right? So which

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companies are IP companies within the utility sector? You've got a couple of them.

One of them is constellation energy which is the uh main one, the the biggest one, ticker symbol CEG. You've got Vistra Corp, Ticible VST, you got NRG Energy, and you got Talon Energy,

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which I mentioned earlier on before. So, let's take a closer look at these stocks because we, you know, you don't want to just blindly go and buy a stock because you think that, oh, the whole sector is going to go up.

There's a lot of demand, let's just go buy the stock. That's one of the classic mistakes that investors make.

Ultimately, before you buy a

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stock, a business, you have to analyze the business. Is it a high quality business that meets your investment criteria?

And is it a long-term investment or is it just going to be a short-term trade? Of course, if it's a short-term trade, you don't really care about the fundamentals.

Just look at the price action. Enter when you got a

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lowrisk entry point, put a stop-loss, put a profit target, that's it. But if it's an investment, you have to do deeper research.

And of course, if it's an investment, then there's no stop-loss, there's no profit target. You just buy and you keep adding it and let it compound for the long run.

So, it

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really depends on on your objectives here. So let me analyze it from more from an investment perspective at this point of time.

So let's look at the granddaddy of them all. Constellation Energy ticker symbol CEG.

So going to stock oracle straight off you can see

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that it's got uh a narrow economic mode which is okay pretty good right but you can see it is currently overvalued right the intrinsic value is 193 and currently it is uh selling at 354 so it's it's a

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bit overvalued right now if you want to calculate your own intrinsic value or use other valuation methods and not just rely on oracle value which is the uh proprietary elgo install oracle you can do that as well. All right.

So if you click on intrinsic value

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you can use whichever method that you want. All right.

So for example if you say I want to use a mean price to sales ratio method well that gives you a valuation of 193 as well. If you want to use a mean price to book ratio method then it's worth 200.

You want to use a

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discounted cash flow method is worth 258. So you can use whichever method that you want you know but notice that whichever method you use the stock price is above all the different valuation methods and of course this is based on the fact that uh fact set which is the

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data provider to stock oracle projects that um constellation will grow at 15% a year in the next 3 to 5 years and grow at um 15% a year in the long term. That is the projected growth rate that's used

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to calculate the intrinsic value. Now, if you think that, oh, it's too pessimistic.

I think they're going to grow a lot higher. They're going to grow at 30%, 40%.

Sure, you can always calculate your own intrinsic value, right? So, for example, you can go to you can use whichever

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method you want. You can say okay I'm going to use a discounted net income method for example and uh instead of the growth rate of 15% I'm going to put a 25% growth rate for example if you're very optimistic and you can calculate and come up with your

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own intrinsic value based on your your own growth projection. Right.

So again stock oracle allows you to calculate your own intrinsic value if you want to. Yeah.

And if you want to find out more about the mode uh how strong is the economic mode again you can go to Oracle

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IQ over here and you can click on the AI mode where it will tell you uh what are the sources of the mode of the company. Again what is mode?

M mode means uh its competitive

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advantage. what allows it to protect itself against competition that that can take away its market share in the future.

Right? So the stronger the mode, the more it is protected against competition.

So bear in mind that companies with no mode with no mode in a

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short term they can make a lot of money. They can grow very fast but in a longer term in 5 10 years they could be disrupted by competition.

That's what no mode means. So, when it comes to short-term trading, I don't care about the mode, whether is it wide mode, narrow mode, I'll still buy.

If it's a

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shortterm to medium-term trade, but if I'm investing for the long term for the next 5, 10 years, then I only want companies with a narrow or wide mode. So, I'm assured that it can't easily be disrupted by competition in the future.

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All right? So, that's how we use the mode.

So if you look at constellation energy for example, you can see again the mode score is 6 out of 10 and uh it you know they've got high barriers to entry. Uh they've got a huge economies

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of scale. So these are the two main sources of the mode.

Now what is also great is you can also take a look at the AI analysis over here AI insights and you can look at the bull thesis and the bare thesis. All right.

So what are

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reasons to buy the stock and what are reasons not to buy the stock right? You have to always look at two parts of the argument and see which is stronger.

So if you think that a bull argument is stronger then something you could think about you can look at what are the growth drivers what is going to drive

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the growth of the company in the future as well as what are the investment risks. Every business every stock has risks.

So what are the short-term risk and what are the longerterm risks? That's really really important, right?

And of course, if you look at the chart,

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you can see that uh yep, in the last 3 years, you can see that oh, it's been on a very strong uptrend, outperforming the S&P. In the last one year, it's also been on an uptrend, but it's been kind of like consolidating recently before it could potentially break out again,

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right? Uh you can also take a look at the financials.

Again, for me, when I invest in a company in the long term, I want to make sure it's got very predictable growth in revenue, profits, and cash flow. If you look at the financials, for example, over here,

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uh, and you can look at the line chart or the bar chart, it's up to you. You can see that again historically it's been uh not that high growth but recently because of the AI revolution it has recently in the last 2 3 years grown

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uh strong in terms of revenue as well as the uh profits right you can see over here it's recently that the uh net income has begun to slowly go up whereas historically it's not been that

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profitable before AI came about. All right.

So that is uh constellation energy. Let's look at the rest.

If you look at the rest like talent energy, you can see there's no mode. So what does it mean?

It means that yeah short term it

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can grow very fast. It can make a lot of money in the short term but in the next 10 20 years it could be uh disrupted by competition.

Bigger competitors could take away their market share. That's what no mode means, right?

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And uh you can see that oh this one doesn't appear to be as as overvalued, right? This one looks like oh sorry it's overv value.

What am I talking about? Right.

Yeah. So Oracle value is 176, right?

It's 395. Again, it's currently a bit overpriced.

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All right. And you can see the PE ratio is like 86 times.

For P is 19 or forward's pretty low. That's pretty that's not too bad.

Again, if you look at financials, you can see that historically, it's not been very consistent. The revenue has gone up and down.

Uh the

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profit, lost money, made money, uh free cash flow has been very inconsistent. Okay?

So, it doesn't really meet the criterias of most of the companies I like to buy. I like to buy companies with consistent revenue growth, consistent profit growth, consistent

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cash flow growth. But this is not yet consistent.

Why? Because it's the the AI revolution only just started.

So it's only recently that they've seen growth in revenue and profits, but they don't have that history yet uh that I like to see in in most companies, right?

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Okay. If you look at Vistra Corp, same thing.

There's no mode, but very high growth recently. You can see the the projected growth in the next 5 years is 19%.

And long-term 47% growth, very high growth company, right? Talent energy

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short-term growth 15%, long-term growth 29%. So these are high growth companies, very high growth, but they're more speculative because they don't yet have a mode to protect them in the long term, but they are very high growth right now.

And they

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they're quite overvalued. All right.

And same thing with NRG Energy. No mode, right?

But very high growth, right? They don't have a long-term growth projection, but short-term growth 15%.

And again, it's overvalued. So, you can

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see that the majority of these stocks uh besides constellation, the rest of them have no mode. Uh they're overvalued and they don't yet have a consistent cash flow and profit track record, right?

But they have very high growth. So in cases

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like that, would I invest in the individual companies? Usually I wouldn't want to.

I may trade them for short-term trading, but for long-term investment, you know, to me, I think it's a bit risky. Okay.

However, however, if I

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think that the whole uh sector, okay, is in a secular growth phase, then I look more to buy an ETF that can diversify my risk rather than all my eggs in one or two companies to

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diversify into some of these companies. So, I can look at ETFs.

Now, would I want to buy the utility ETF, the XLU ETF? Uh, no.

Okay. Why?

Because remember that the utility ETF XLU, if I put in

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XLU, recall that this ETF will not be able to beat the S&P 500. Why?

Because this ETF, it doesn't just consist of the IPs, which are the high growth power

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producers. They they also have a lot of these traditional regulated utilities that are slow growth.

Profit margins are fixed that will slow the growth down. So because of that, I only want to invest in an ETF that has this one but doesn't

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have this one. Now nowadays there are many many ETFs and of course this is not a recommendation for you to buy any of these ETFs.

I'm just sharing it for educational purposes but these are four of the uh more popular ETFs that contain

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those independent power producers. So for example, you've got this ETF AIPO where their strategy is investing in AI infrastructure and grid components.

So this ETF doesn't just contain the independent power producers which I

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mentioned like CEG, VST, they also contain companies that make the infrastructure and hardware to handle the power which are basically the grid, right? So it's a full ecosystem, not just the power producers, but you're also owning companies that provide the

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hardware and the grid engineering to handle that power. All right.

So uh how much of this ETF uh is concentrated into the IPs? Roughly about 15 to 20%.

Now the other one the other ETF is UTES

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which is an active utility management. So this ETF has the highest concentration into the IPs which is about 36% into again CEG, VST and TLN.

This is more of a pure play high conviction bet on the IPS and not adding

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in the other hardware and infrastructure players which are more within the industrial sector. Then another uh way to play this is the nuclear and uranium focused ETFs like NLR as well as another one NUKZ which

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I've been selling uh cash secured put options on as I share in my ultimate investors playbook community. So this particular two ETFs NLR and NUKZ they don't just consist of the IPS but they also have got uranium producers like

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Chemical COP ticker symbol CCJ and the the last option would to invest would be to invest in broad utility ETFs like IDU and as mentioned XLU. So this doesn't just consist of the IPs,

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they also consist of the traditional regulated utilities and uh so you may say you know which is the right one there's no right one it depends on what you want to focus on right you just want to focus on IPs then this is the one you want to focus on IPs and grid

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infrastructure and industrial components that handle the power then is AIPO if you want to invest in IPS plus some of the nuclear uh and uranium stocks then it's more of NLR and the last one is a broad approach but of course this has

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got the lowest growth. If you take a look at the last one year you can see that uh NLR which is the one that consists of the nuclear stuff that has uh way outperformed has the biggest performance versus the S&P 500 spy and

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next in line would be UTES which I mentioned of course the last would be XLU and IDU. Now for AIPO, notice that it only listed uh here, right?

It only listed here back back in July. So you

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can't compare it with the rest uh one year later, right? So if you want to compare AIPO, then you have to drag the chart where everything starts in uh late July.

So if I drag the chart to July

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Yeah. So you can see that uh based if if you Yeah.

from from there sorry late July right you can see again NLR has the highest uh return because it includes a lot of the nuclear and uranium stocks that are right now uh really exciting and then second would be AIPO

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beating the spy but these three have underperformed the spy recently right so personally for me I actually bought the AIPO some time ago for those of you who are in the UIP the ultimate investors playbook my private community you would have gotten my uh alert exactly when I

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bought AIPO. Again, this is not a recommendation for you to buy.

It's an analysis of the sector and sharing with you my thought process of when I buy ETFs versus individual companies. Thank you for listening and have a great year ahead.

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This is Adam Coup and may the markets be with

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