Today’s issue in preview:
- Market tested, market approved: The “safe way to invest in soaring AI power demand” earns its nickname
- This industry offers strong stocks and big yields. Are you profiting yet?
- Here’s how “trend picking” can either make you or lose you a fortune
- Bitcoin may have finally bottomed
Market tested, market approved: The “safe way to invest in soaring AI power demand” earns its nickname
Credit: Ron and Patty Thomas
On February 24, I reiterated my recommendation to own utility stocks as a safe way to play soaring AI power demand. This week, the market enthusiastically agreed with the call.
As markets around the world have declined amid Operation Epic Fury, the Utilities Select Sector Fund (XLU) has held steady like a rock. It’s a bullish sign for this theme.
Regular readers know one of the largest and most profitable facets of the AI megatrend is power consumption. Thanks to AI’s enormous promise, giants like Google, Meta, Microsoft, and OpenAI are spending hundreds of billions of dollars a year on data centers, AI chips, and other infrastructure components.
All that AI infrastructure is poised to consume huge amounts of electricity. Goldman Sachs forecasts global power demand from data centers will climb 50% by 2027 and as much as 165% by the end of the decade. This demand is driving a big bull market in virtually every form of electric power production.
One of my recommended ways to invest in this megatrend is via electric power producers… aka “electric utilities.” When you invest in utilities, you are not risking your money by trying to pick the company that creates the best AI-powered software application or the best AI-powered travel site.
Instead, you’re making the safe bet that every company and every individual using AI ends up buying some electricity to power it. It’s the old “selling picks and shovels to Gold Rush miners” strategy applied to AI.
While the broad market has sold off since the start of Operation Epic Fury, utility stocks have held firm. From the February 25 close through the March 3 close, the benchmark S&P 500 dropped 1.86%. During the same period, XLU dropped just 0.61%. It is within 1% of its all-time high.
During periods of market weakness, I look for which stocks, ETFs, and themes are holding steady or advancing. It’s a “stress test.”
If the market drops 3%, you want to see what drops just 1%. If the market drops 2%, you want to see what climbs 1%. That sort of thing. This is often called “relative strength.” It allows you to spot the safer megatrends for investment.
It’s like looking at a beachfront neighborhood after a hurricane. Some homes lost their roofs, and some homes were blown away. But some homes were unbothered by the storm. Those are the strongest homes.
The utility sector’s strong relative performance indicates that the fundamental forces driving it higher are very strong. We’re still bullish.
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This industry offers strong stocks and big yields. Are you profiting yet?
Credit: NiseriN
While we’re handing out awards for the strongest themes in a market storm, let’s not forget the pipeline sector we’ve been bullish on for years. The Alerian MLP ETF (AMLP) held just as steady this week as utility stocks.
In early 2024, I began to see the natural gas pipeline business as the best way to generate passive income from the AI boom. As I mentioned in the above utility note, AI data centers are becoming a significant and growing source of electricity demand.
I’ve frequently mentioned how this demand is a bullish driver for natural gas. Natural gas is the preferred clean-burning fuel for power plants that support AI data centers. This is why natural gas producers such as EQT (EQT), Antero (AR), Expand Energy (EXE), and Range Resources (RRC) are compelling long-term stock ideas.
However, all the natural gas in the world isn’t worth much if you can’t transport it to customers.
This is where America’s vast natural gas transportation, processing, and storage industry comes in. An extensive network of pipes crisscrosses America to allow energy companies to transport natural gas from the wellhead to the power plant. If we get an AI-driven boom in natural gas consumption, we get a boom in natural gas transportation by default.
The market likes our fundamental case for pipelines. AMLP is the world’s largest ETF focused on pipeline operators. It holds the “who’s who” of American energy pipeline operators. The fund’s current yield is 7.53%. This is an incredibly high yield in a world where your typical dividend ETF yields 3%-4% and corporate bond funds yield 4%-5%.
While many market sectors are down significantly over the past week, AMLP has held steady. It is trading near its recent all-time high. Like the utility trend, this one is market-tested and market-approved. We’re still bullish.
Here’s how “trend picking” can either make you or lose you a fortune
Credit: Kasra Keighobady
Every big industry boom. Every big industry bust. The good times and the bad times. They eventually enter the real estate business.
Over the past year, this fact has played out dramatically for shareholders, in good ways and bad ways.
On February 18, I highlighted how the Boomer health care theme I’ve been bullish on for years is driving a big bull market in the senior care industry. I noted how senior living Real Estate Investment Trusts (REITs) such as Welltower (WELL), Ventas (VTR), Omega Healthcare (OHI), and CareTrust (CTRE) are enjoying soaring market values thanks to strong demand from aging Baby Boomers.
On the other hand, the office REIT sector is sinking. Yesterday, I highlighted the bear market in major U.S. office REITs Boston Properties (BXP), Vornado Realty (VNO), and SL Green (SLG). Investors are worried that AI will drive major white collar job losses, which could reduce demand for prime office space. The selling enthusiasm has driven these three firms to one-year lows.
Now is a good time to remember why thinking of Wall Street as “a market of stocks and not a stock market” is such a powerful idea.
When the mainstream press reports on the economy and business, the performance of “the stock market” is almost always cited.
“The stock market climbed 2% today…”
“The stock market fell today on news of higher inflation.”
That sort of thing.
Reporting on the economy and businesses using simple concepts, such as “the stock market,” makes sense for the media. It’s fast. It’s easy. And that’s all many people care to understand.
However, I believe there’s a much smarter, more useful way of thinking about the economy, businesses, and your investments.
Instead of focusing on what “the stock market” is doing, I recommend you adopt the mindset of “Don’t think of it as a stock market. Instead, think of it as a market of stocks.”
In other words, realize that the stock market is a place where you can buy and sell ownership stakes in many different types of businesses that operate in many different industries. And realize that various economic climates affect those businesses and industries differently.
Something good for one industry isn’t necessarily good for another.
For example, the 2020 Covid-19 crisis was beneficial for video-conferencing companies and delivery companies because so many people stayed home… but it was terrible for fitness centers and cruise operators.
Or, consider how a long period of declining oil prices is bad for oil producers… but it’s great for airlines, since fuel is a major cost for them.
Instead of thinking of “the stock market” as a monolithic entity into which you put money, I prefer to focus on individual industries, unique market trends, and how those affect individual companies.
A whole lot is happening behind the curtain we call the S&P 500 index.
This phenomenon is at work in the real estate industry… where every industry boom and every industry bust eventually ends up. When the demand for space is booming, landlords are happy. When demand is busting, landlords struggle.
The senior living boom has driven Welltower to 71% returns over the past 18 months. The office REIT bear market has driven Boston Properties to negative 20% returns over the same period. It’s a whopping 91% difference in returns.
Not only can the annual returns of different asset classes vary greatly… and not only can the annual returns of different sectors vary greatly… but the annual returns of various industries inside a sector can vary greatly. So yes, it’s useful to think of Wall Street as “a market of stocks, not a stock market.” Stick with Money & Megatrends to stay in the booms and avoid the busts.
Market Notes
- Bitcoin may have put in a bottom. The cryptocurrency reached a new one-month high today of $71,400.
- Our 2024 recommendation to invest in drones continues to pay off. Drone giant Elbit Systems (ESLT) reached a new all-time high today. The stock is up 154% over the past year.
- The aluminum industry is trending higher. Aluminum product manufacturer Century Aluminum (CENX) reached an all-time high today.
- Retail giant Target (TGT) reached a new one-year high today.
Regards,
Brian Hunt
Editor, Money & Megatrends
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