In this piece, we will take a look at the 10 best infrastructure stocks to buy now.
Whether it’s for the services industry or the manufacturing sector, infrastructure is the building block of any economy. In fact, this principle has been pushed to the forefront of investing in 2024 as investor optimism about the potential offered by artificial intelligence has also led to interest in stocks that will enable businesses to set up massive data centers for running their AI workloads.
This was evident in a report from Goldman in July. It bifurcated AI firms into four sectors that were numbered according to the timeline at which they would see returns. The first set of firms was chip manufacturers, and its year to July returns sat at 139% and was represented only by one firm. The second set were firms that focus “on AI infrastructure, including semiconductor firms more broadly, cloud providers, data center REITs, hardware and equipment companies, security software stocks, and utilities companies.”
As per the bank, the 90th percentile return of these AI infrastructure firms was roughly 50% while the average AI infrastructure stock had delivered 22%. Within these stocks, Goldman shared that utilities were the top performers as their returns were 16% between March and May; a performance which ranked in the 98th percentile since 2002 and out shined only by returns during 2003 and 2020. For more details, you can check out Goldman Sachs’ Best Hedge Fund Stock Picks: Top 20 Stocks.
While this performance might be surprising, a look at AI infrastructure demand shows that it shouldn’t be. As per research from the Boston Consulting Group, AI power demand can grow by as much as 20% per year by 2030 to sit at 130 Gigawatts and account for 16% of US energy use. America’s data center hub Northern Virginia is a clear example of this phenomenon. Local regulators believe that data center energy demand in the state can sit at 11 GW in 2035, and as part of efforts to meet it, $2.5 billion in spending is already underway. Not to mention that the copious amount of heat generated by AI GPUs is creating its own set of problems as estimates show that global AI demand could require as much as 6.6 billion cubic meters of water for cooling by 2027. If you’re interested in learning more about AI infrastructure, you can read 15 Best Data Center Stocks To Buy According to Jefferies, Citi and Wall Street Analysts.
Shifting gears, while AI is expected to reshape America’s infrastructure, it isn’t the only catalyst. The US’ aging roads and bridges have been a constant source of political tension. Two initiatives that will create sizeable catalysts for infrastructure in the US are the Bipartisan Infrastructure Law (BIL) and the Inflation Reduction Act (IRA). When coupled with the CHIPS and Science Act, these initiatives earmark a collective $2.4 trillion in government spending to overhaul America’s roads and build new factories to make semiconductors.
Under these three initiatives, as of September 3rd, 2024, under the Biden Administration, private companies had announced $323 billion in transportation investments for infrastructure such as roads, bridges, and airports. An additional $82 billion has been announced for investments in clean energy manufacturing and infrastructure, while $42 billion and $47 billion have been announced for biomanufacturing and heavy industry, respectively.
This spending has also started to yield results. The IRA marked its first anniversary in July 2023 and by then it had added 170,000 new jobs and 272 new projects via $272 billion in investments. Some of the notable infrastructure wins included Minnesota’s largest solar power plant. For more details, take a look at 10 Best Manufacturing Stocks To Buy According to Analysts.
Of course, while government spending has catalyzed infrastructure spending, it doesn’t mean that the tailwinds faced by the sector are over. Infrastructure build outs hinge on low interest rates since they require vast amounts of capital. With interest rates at a 24 year high in the US, the industry has suffered. This has come in the form of US construction spending slowing down to $2.1 trillion in May for a 0.1% drop. The slowdown is led by public works and healthcare projects which dropped by 3.4%. Delving deeper into the 0.1% sequential drop in May, it was led by private, residential, and single family construction which dropped by 0.3%, 0.2%, and 0.7%, respectively.
Yet, high rates are not always bad news for infrastructure stocks. Since these stocks rely on sizeable and stable income from large projects, they often reward investors in the form of dividends. Higher rates mean bond yields increase and compete with infrastructure stock dividend yields. This forces these firms to attract investor capital by passing through higher costs to their projects (think of higher toll fees). Once these costs have passed through, infrastructure stocks can increase their dividends. Data shows that after six months, one year, three years, and five years following the Federal Reserve’s last rate hike cycle, stocks that were part of ClearBridge’s RARE 200 infrastructure investment strategies posted 15%, 28%, 44%, and 90%, respectively. This enabled them to lead global equities by five, 13, 19, and 38 percentage points, respectively.
With these details in mind, let’s take a look at the best infrastructure stocks to buy according to hedge funds.
A team of technicians working on a server of bitcoin mining equipment in a data center.
Our Methodology
To make our list of the best infrastructure stocks to buy, we listed the US listed holdings of iShares’ infrastructure ETF that tracks global equities by the number of hedge funds that had bought the shares in Q2 2024. Out of these, the top infrastructure stocks were chosen.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
10. American Electric Power Company, Inc. (NASDAQ:AEP)
Number of Hedge Fund Holders In Q2 2024: 35
American Electric Power Company, Inc. (NASDAQ:AEP) is a diversified utility that generates power through renewable and conventional resources. Since it’s a utility, the firm’s performance is evaluated through its return on equity (ROE), customer energy purchase commitments, and the prices that it is able to negotiate for its electricity. American Electric Power Company, Inc. (NASDAQ:AEP)’s ROE right now is 8.9%, and the firm expects to improve it this year through negotiating with regulators. Utilities have their ROE set by regulators since an excessively high ROE might overburden consumers while a low ROE might not attract investment. American Electric Power Company, Inc. (NASDAQ:AEP) is currently looking at improved ROEs for three facilities to come into effect this year. These range from 9.76% to 9.86%.
As for AI spurred data center power demand, here’s what American Electric Power Company, Inc. (NASDAQ:AEP) had to say during the Q2 2024 earnings call:
“Regarding data center load, we have commitments from customers for more than 15 gigawatts of incremental load by the end of this decade, mostly driven by large load opportunities. To put this in perspective, AEP’s system-wide peak load at the end of last year was 35 gigawatts. We continue to work with data center customers to meet their increased demand, while ensuring contracts and new initiatives are fair and beneficial for all of our customers. In the fall, we will provide an update on what this large load opportunity means for our capital spend, including generation and transmission investment, and on our plan to responsibly finance this growth initiative.”
9. Exelon Corporation (NASDAQ:EXC)
Number of Hedge Fund Holders In Q2 2024: 37
Exelon Corporation (NASDAQ:EXC) is a Chicago based electricity and natural gas distributor. The firm operates through subsidiaries such as Pepco Holdings, Commonwealth Edison (ComEd), and Peco. These provide Exelon Corporation (NASDAQ:EXC) a footprint all over the US, as ComEd serves more than 4 million electricity consumers in Illinois, and PECO has a customer base of 1.7 million in Pennsylvania. This also means that if these key business divisions fail to secure favorable rates, then Exelon Corporation (NASDAQ:EXC)’s stock suffers particularly as today’s high rate environment offers investors plenty of alternatives. Its shares are down 2.45% over the past twelve months, as they fail to shrug off a 16% drop in December after Illinois regulators rejected ComEd’s four year grid plans to help the state transition to 50% renewable energy by 2040. Exelon Corporation (NASDAQ:EXC)’s investors were further disappointed by ComEd’s 8.91% ROE award which was lower than the recommended 9.28% and the firm’s ask of 10.50%.
As these troubles are key to Exelon Corporation (NASDAQ:EXC)’s hypothesis, here’s what the firm’s management had to say during the Q2 2024 earnings call:
“Our revised Grid Plan process in Illinois is on track and approval by the end of the year is a top priority. Since our last earnings call, we are through two rounds of testimony from staff and intervenors, and we have narrowed open issues with many interveners and staff. We will continue to work with parties to address open items in advance of the evidentiary hearings. We are encouraged that we’ve been able to reach agreements with key parties like the City of Chicago, the Building Owners and Management Association and the environmental coalition, JNGO [ph].
Each has recognized the progress made in our revised plan and its compliance with the Climate Equitable and Jobs Act, a key focus of the commission. These affirmations are good examples of what differentiates the process this year. Approval of the plan will ensure that Northern Illinois will receive the investment needed to maintain an affordable, resilient, reliable and clean grid for its customers and will support the state’s success in attracting new business.”
