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These Secret Winners of the AI Boom are Flying Under the Radar

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The artificial intelligence frenzy may be just getting started.

AI has been the buzzword over the last year as companies race to leverage the power of new technologies. Big tech remains at the forefront of the movement; chipmakers, software companies, and cloud computing giants are garnering more revenues amid the emergence of generative AI.

But the artificial intelligence hype reaches far beyond big tech.

The secret winners of the AI boom?

The companies that will power it. Literally.

Utilities are expected to witness flourishing demand as more data centers go online. Power consumption is set to increase massively over the next few years and beyond.

Traditionally thought of as a defensive pocket of the market, the sector is often seen as a haven during economic downturns. The thinking is that due to their stable and consistent dividends along with relatively lower price volatility, investors are driven to utilities during times of market stress and recessions.

Now, the utilities sector is currently undergoing vast changes including advancements in grid modernization and expansions in infrastructure.

And the market is backing up this theme. As we know, the stock market its forward-looking, and right now it’s telling us to expect positive things in this sector moving forward.

The Utilities Select Sector SPDR ETF (XLU - Free Report) is hitting 52-week highs on increasing volume. The XLU ETF provides an effective representation of the utilities sector of the S&P 500 index. XLU offers exposure to companies across a broad range of services including electric utility, water utility, independent power and renewable electricity producers, and gas utility industries.

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We know from extensive studies of market history that new highs are bullish and a sign of strength. A closer look at the Zacks Utilities Sector reveals an interesting prospect.

Narrowing Down the Investable Universe

The Zacks Sector Rank helps us identify which sectors (along with corresponding industry groups and individual stocks) are primed to outperform the market. The average Zacks Rank is calculated for every sector each day. A top Zacks Sector Rank means more stocks within that group are receiving upward earnings estimate revisions.

Earnings estimate revisions lie at the heart of the Zacks Rank, and these revisions have been shown to be the most powerful force impacting stock prices.

The Zacks Utilities Sector currently ranks in the top 25% out of all 16 Zacks Ranked Sectors, so we know that stocks in this pocket of the market are experiencing increasing earnings estimates. Once this top sector is identified, we can peel back the curtain to find leading industry groups.

Digging a bit deeper, the Zacks Utility – Electric Power industry is ranked in the top 32% out of approximately 250 total industry groups. As such, we expect this group to outperform the market over the next 3 to 6 months.

Quantitative research studies have shown that roughly half of a stock's price movement can be attributed to its industry group. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.

Employing this simple yet effective method of uncovering leading sector and industry group combinations can help us locate stocks with the best profit potential.

An Intriguing Stock Worthy of Consideration

The Zacks Electric Power industry group contains candidates that are expected to benefit from increased power consumption amid the AI boom. One such company is Constellation Energy (CEG - Free Report) . A Zacks Rank #2 (Buy), Constellation Energy generates and sells electricity in the United States. CEG stock has rewarded investors in 2024 with a nearly 70% return:

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Analysts covering CEG remain bullish and have been increasing their earnings estimates lately. First-quarter estimates have risen 13.07% in the past 60 days. The Zacks Consensus Estimate now stands at $1.99/share, reflecting a whopping 586% jump relative to the year-ago period.

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Constellation Energy is set to report quarterly results this Thursday before the market open. The company surpassed earnings estimates in two of the past three quarters, and has delivered a trailing four-quarter average earnings beat of 30.1%.

The onset of AI is paving the way for utilities to fly under the radar. Be sure to keep an eye on related stocks such as CEG.

See More Zacks Research for These Tickers

Normally $25 each - click below to receive one report FREE:

Constellation Energy Corporation (CEG) - free report >>

Utilities Select Sector SPDR ETF (XLU) - free report >>

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