AI Mania has electrified utilities Vistra and Constellation Energy.

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The first half of the year is coming to a close, and investors are still obsessed with giant tech stocks. Sure enough, Nvidia just made a short fix. But it is still the second best performer.


S&P 500

For both the second quarter and all of 2024, with a gain of over 150%. Super Microcomputer leads the year and First Solar is the best S&P stock for the second quarter. Apple and Alphabet are also among the top performers over the past three months.

But Nvidia and other tech giants aren't the only ones riding the artificial intelligence wave. Check out the two utilities. Vistra has more than doubled this year. Nakshatra energy has increased by about 80%. Compare this with the rest of the sector. The Dow Jones utility average is up about 2 percent this year.

Both Vistra and Constellation have promoted AI because they own nuclear power plants, which are key to meeting the intense energy demands required by large-scale server farms. Unlike coal or natural gas, nuclear power produces electricity without producing global warming emissions.

As a result the companies are expected to post impressive revenue growth this year, with analysts predicting growth of around 40% for Vasra and 55% for Nakshatra Energy. That's significantly higher than the expected dividend growth of many other utilities, which until recently were seen more as safe havens and bond proxies because of their high profitability.

Other top utilities, such as Duke Energy
,

South
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and Dominion Energy
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Still fit the bill. They pay dividends that range from 3.7% for Southern to 5.4% for Dominion. Vistra and Constellation, by contrast, yield less than 1%, largely because their stock prices have risen dramatically. The yield is the annual profit divided by the share price.

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This has 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 to maintain their standards. More than 20% of large-cap funds owned at least one top utility stock as of the end of May, compared with just 13% at the start of the year, data from BofA Securities showed. And hedge fund ownership of utility stocks is at its highest level since 2011.

Can the momentum of these two stocks continue? UBS analysts said in a recent report on Constellation that “we do not believe the fundamentals have deteriorated” and that “power demand from data centers is likely to increase”.

The problem, though, is that it may be more than reflected in the stock price. Constellation shares now trade at more than 27 times estimated 2024 earnings, compared to a P/E of just 17.5 for the Utility Select Sector SPDR exchange-traded fund. On the other hand, Vistra's price is 17 times higher than forecasts — a slight discount to its peers.

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So the Vistra may have a little more room to maneuver than the Constellation, which is starting to look frothy. To that end, Constellation shares fell more than 5% on Wednesday as bond yields rose. Vistra also fell about 4 percent. Both companies will need to continue strong earnings growth to justify why their stocks should outperform their peers by such wide margins. Otherwise, there may be a painful shift in meaning.

Write to Paul R. LaMonica at paul.lamonica@barrons.com.

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