By Medha Singh and Seher Dareen
(Reuters) - Nuclear power companies Constellation Energy and Vistra have become the top S&P 500 performers after Super Micro and Nvidia (NASDAQ:NVDA), as investors look beyond semiconductors and bet on firms catering to an artificial intelligence boom in any capacity.
Shares of Vistra have jumped 132% this year, and those of Constellation Energy climbed 81%, compared with a 16.7% rise in the benchmark S&P 500, as rising demand for power from data centers, manufacturers and electric vehicle makers creates a need for clean and sustainable supply of energy.
"Long-only" investors and hedge fund exposure to the sector are at record highs, Bank of America said in a note in June.
More than 20% of large cap funds own at least Vistra or Constellation's stock compared to just 13% at the beginning of the year, BofA said.
"You'd want to be levered to the clean energy theme and anything that's related to data center demand," within the sector, said Adam Turnquist, chief technical strategist for LPL Financial (NASDAQ:LPLA).
Nuclear energy companies such as Constellation and Vistra are particularly expected to benefit from the U.S. government's push for big tech firms to invest in new climate-friendly energy generation to cater to surging AI power needs.
Joseph Dominguez, chief executive officer of the largest operator of U.S. nuclear plants Constellation Energy, said in May "the data economy and Constellation's nuclear energy go together like peanut butter and jelly."
Analysts believe the unregulated utilities, which allow more competition, could also enter long-term contracts with AI data centers, similar to the one signed between Talen Energy and Amazon (NASDAQ:AMZN) Web Services (AWS) earlier this year, which would improve their margins and cash flow.
The Talen-AWS deal has "helped drive higher expectations for Constellation and Vistra which also have nuclear facilities that are well positioned to execute a similar transaction," said James Thalacker, managing director at BMO Capital Markets.
VALUATION
Bets that the 10-year U.S. Treasury yields have peaked are supportive of the dividend-paying utilities sector that competes with fixed income for capital.
However, the valuations of some unregulated utilities are trading above the industry average. Constellation trades 25 times its 12-month forward earnings estimates compared with S&P 500 utilities sector's 16.5 multiple, LSEG data showed.
"The valuation premium is justified by the quantum increase in profits that these companies will capture on the back of tighter supply-demand," said Michel Sznajer, portfolio manager at Ecofin.
Until May, utilities was among the best performing S&P sectors but has since pared some gains.
Nicholas Colas, co-founder of DataTrek Research, said investors' "backdoor play on artificial intelligence ... seems to have fizzled, at least for the moment."
"Utilities sector is a reasonable place to put capital for a decent long run total return, but we'll stick to tech stocks as a more direct way to profit from AI," Colas said.
(This story has been refiled to fix the spelling of Bank of America in paragraph 3)