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.”
8. The Williams Companies, Inc. (NYSE:WMB)
Number of Hedge Fund Holders In Q2 2024: 37
The Williams Companies, Inc. (NYSE:WMB) is a diversified energy infrastructure firm that lays out transmission lines, gas pipelines, and other projects. Since it depends on natural gas demand for its facilities to a large extent, higher demand leads to more revenue and vice versa. Natural gas futures are priced at $2.36 while gas is currently trading for $2.30, The Williams Companies, Inc. (NYSE:WMB) can see catalysts from this as gas buyers seek to purchase now and store the commodity for future use. The firm is also currently busy expanding its gas transmission network, and it plans to have replaced 112 gas compressors by 2024 end. These can allow The Williams Companies, Inc. (NYSE:WMB) to benefit from increased capacity and allow it to utilize favored rates. It has also partnered up with Chevron for the oil giant’s Deepwater project in the Gulf of Mexico, through which The Williams Companies, Inc. (NYSE:WMB) will serve as Chevron’s gas gathering partner. Once the project starts operations, the firm could see additional revenue tailwinds.
The Williams Companies, Inc. (NYSE:WMB)’s management touted its strong financial performance during the Q2 2024 earnings call over the years as one reason for investors to be faithful:
“We are the most natural gas-centric large-scale midstream company around today, and our natural gas-focused strategy continues to deliver growth on top of growth quarter after quarter. And to that point, we’ve now seen 11 consecutive years of adjusted EBITDA growth and an 8% compound annual growth rate of our adjusted EBITDA since 2018. In addition, we have realized a 19.5% return on our invested capital during the last 4 years, and our steadfast project execution led to record contracted transmission capacity and will continue to drive per share growth in 2024 and beyond. In fact, our current projects in execution have higher returns than this prior 4 years. So in closing, we’ve built a business that is delivering record profitability and strong financial returns in the present, but is positioned for even faster — for an even faster-growing future.”
7. Duke Energy Corporation (NYSE:DUK)
Number of Hedge Fund Holders In Q2 2024: 37
Duke Energy Corporation (NYSE:DUK) is an electricity and gas company headquartered in Charlotte, North Carolina. As of H1 2024, more than 91% of its revenue is from electricity, which means that it remains vulnerable to seasonal trends. Electricity demand is typically high during the summer season, and Duke Energy Corporation (NYSE:DUK) has to consider alternative avenues to bolster earnings during the rest of the year. On this front, the firm has several initiatives in play. Duke Energy Corporation (NYSE:DUK)’s South Carolina division having secured regulatory approval for a rate increase from August. The firm is also planning to take similar steps in Florida, through a new rate plan that aims to save consumers up to 5%. This plan is anticipated to come into effect in January 2025, right when Duke Energy Corporation (NYSE:DUK) might face some seasonal headwinds to electricity demand.
Duke Energy Corporation (NYSE:DUK) is quite optimistic about its ability to capture the growth in data center demand as well. Here is what management shared during the Q2 2024 earnings call:
“So as we think about this economic development pipeline over the period that we’ve shared with you through ’28, data centers represent about 25% of that pipeline. But as we get out to 2030 and beyond, that 25% grows. And so we already see a lot of growth in the economic development pipeline for data centers moving into 2030 and beyond. So I would think about this MoU as not only further catalyzing how we might serve customers that are in the pipeline, but our hope also is that those customers will have an interest in expanding in our service territories as we find a way to continue to meet their needs on sustainability, but also bringing resources on.
So the discussions are early. I think there’s a clear understanding that we are trying to do a couple of things here. We’re trying to meet the load. We’re trying to meet their sustainability goals, we’re trying to do so in a way that protects retail customers, we’re trying to meet their time lines. And I would say the discussion is very constructive. And the notion of risk sharing is something that we’re very clear on and have lots of experience in talking with customers about. And so I think those — that element of the discussion is going well as well. So we’ll keep you informed as we start to mature some of these agreements into something that’s more definitive, there will be disclosure, and we’ll continue to update you on the economic development pipeline as we go.”
6. Targa Resources Corp. (NYSE:TRGP)
Number of Hedge Fund Holders In Q2 2024: 39
Targa Resources Corp. (NYSE:TRGP) is a Texas based company that develops infrastructure to store and transport natural gas, natural gas liquids, and associated fuel. Its exposure to the natural gas industry without any alternatives means that the firm faces trouble if the industry slows down as has been the case in 2024. However, unlike several other gas infrastructure firms, Targa Resources Corp. (NYSE:TRGP) has managed to hedge this storm through its presence in America’s Permian Basin. As of 2022, Permian accounted for 18.3% of America’s gas production which marked a sharp jump from 2011’s 5.8%. This has helped Targa Resources Corp. (NYSE:TRGP), with the stock being up a massive 74% year to date. It has also enabled the firm to tamper down potential forecast drops. The firm also benefits from a tertiary logistics and marketing business that operates fractional facilities and enables Targa Resources Corp. (NYSE:TRGP) to gauge the demand for its gas by operating directly in the market.
Targa Resources Corp. (NYSE:TRGP)’s management shared details about its Permian operations during the Q2 2024 earnings call:
“Activity in the Permian remains very strong, supporting our view of continued long-term growth from the basin. Our Permian volumes during the second quarter increased about 275 million cubic feet per day over the first quarter, which is a full plant. And year-over-year, our volumes in the Permian are up more than 600 million cubic feet per day. And currently, our volumes in the Permian are up another 200 million cubic feet per day compared to the second quarter. We expected strong growth from our Permian assets, but the growth we have seen this year has exceeded our expectations.
We now expect low double-digit percentage volume growth this year, which sets us up well for meaningful growth in 2025 and beyond. This higher growth rate is driving incremental EBITDA and requiring additional growth capital investment. These volumes are core to our business, and we benefit across the integrated NGL value chain, driving higher margins into our downstream business and generating strong ROIC. Given higher-than-anticipated Permian volumes and an outlook for continued strong activity across our Midland and Delaware footprint, we announced our next two plants in the Permian, one in the Midland Basin and another in the Delaware Basin. Some spending for these plans was included in the forecast we provided back in February, but the timing and cadence of spending has accelerated.”
5. Kinder Morgan, Inc. (NYSE:KMI)
Number of Hedge Fund Holders In Q2 2024: 41
Kinder Morgan, Inc. (NYSE:KMI) is a petroleum products infrastructure company that operates gas and refined petroleum storage and transportation assets. As of H1 2024, 58% of its revenue comes through natural gas pipelines, which means that as long as the industry is robust, the firm continues to benefit. As a result, Kinder Morgan, Inc. (NYSE:KMI)’s shares have gained a modest 26% over the past 12 months as natural gas prices have dropped. However, the future might hold promise for the firm as gas production is expected to drop in the wake of the lower prices. This means that prices might rise to allow Kinder Morgan, Inc. (NYSE:KMI) to benefit, especially since its previous locked gas contract prices were higher than the market. Additionally, its extensive gas pipeline network sets up the firm well for the growth in US liquefied natural gas (LNG) exports, 60% of which have been directed towards Europe.
Kinder Morgan, Inc. (NYSE:KMI)’s management is also seeing some demand from data centers for its gas. Here’s what it shared during the Q2 2024 earnings call:
“Let’s start with the data center demand. Utility IRPs and press releases published since 2023 reflect 3.9 Bcf a day of incremental demand, and we would expect that number to grow as other utilities update their IRPs. It’s early in the process, but we’re currently evaluating 1.6 Bcf a day of potential opportunities.
Most estimates we have seen are between 3 and 10 of incremental gas demand associated with AI. Rich took you through the 20 Bcf a day of natural gas power that Texas is contemplating, subsidizing, I should have said 20 gigawatts as well as the US projection of 133 new gas plants over the next several years. At Kinder Morgan, we’re having commercial discussions on over 5 Bcf a day of opportunities related to power demand, and that includes the 1.6 of data center demand. Certainly, not all these projects will come to fruition, but that gives you a sense of the activity levels we’re seeing and supports our belief the growth in natural gas between now and 2030 will be well in excess of the 20 Bcf a day.”
4. PG&E Corporation (NYSE:PCG)
Number of Hedge Fund Holders In Q2 2024: 46
PG&E Corporation (NYSE:PCG) is an electricity and gas company that caters to the needs of consumers in California. As of H1 2024, 72% of the firm’s revenue came through electricity. This means that PG&E Corporation (NYSE:PCG) is dependent on regulated ROE’s and electricity prices that are locked in. Additionally, electricity is also a seasonal market which sees demand grow in the summer season and drop during winters. Since it’s a utility, PG&E Corporation (NYSE:PCG)’s fate is dependent on regulators to a large extent, and this has been true for the last year and a half. The firm has sought the California Public Utilities Corporation’s (CPUC) approval to sell 5.6 gigawatts worth of non nuclear generation assets. However, the CPUC has rejected the plan to create hurdles in PG&E Corporation (NYSE:PCG)’s efforts to raise capital to manage wildfire risks and fund clean energy growth.
While the CPUC hasn’t been kind to PG&E Corporation (NYSE:PCG) for the sale’s approval, it did recently approve higher ROE’s. Here’s what management shared during the Q2 2024 earnings call:
“Just this month, in fact, the CPUC voted out Phase 2 of our general rate case, authorizing an incremental $2.3 billion of capital investment for energization with an opportunity to go back in and request more if customers need it. We were encouraged by comments from the commissioners, which supported the thesis that connecting new load can be beneficial for broader customer affordability. At the same meeting, the CPUC approved staff’s resolution affirming increasing our return on equity to 10.7%. California’s regulatory environment is strong, forward-looking, and delivers real value for customers and investors. “
3. Cheniere Energy, Inc. (NYSE:LNG)
Number of Hedge Fund Holders In Q2 2024: 65
Cheniere Energy, Inc. (NYSE:LNG) is a liquefied natural gas (LNG) infrastructure operator with facilities in Louisiana and Texas. It is one of the handful of American firms that seized the opportunity after the Russian invasion of Ukraine to grow their LNG exports to Europe. Cheniere Energy, Inc. (NYSE:LNG)’s European LNG exports sat at roughly 67% of its total exports in 2023. This can provide the firm with an enduring market particularly since the Russian invasion and the corresponding sanctions have permanently altered the structure of European energy demand. Additionally, Cheniere Energy, Inc. (NYSE:LNG)’s key European and Asian markets are also increasing their regasification capacity, which can boost the demand for the firm’s products. However, efforts by other countries to promote local energy sources or store most of their imports can lead to headwinds. Cheniere Energy, Inc. (NYSE:LNG)’s exposure to Asia, and China and particular, could see business threatened by sanctions or global supply chain disruptions.
TimesSquare Capital Management mentioned Cheniere Energy, Inc. (NYSE:LNG) in its Q1 2024 investor letter. Here is what the fund said:
“The strategy’s top detractor was the -5% retrenchment from Cheniere Energy, which operates liquid natural gas (LNG) liquefaction facilities for the global transportation of LNG. While revenues and earnings were as expected, management’s initial guidance for the new fiscal year was lower than anticipated. Cheniere was conservative—appropriately so in our view—regarding plant volumes as election-year noise surrounding the regulatory environment could dampen LNG exploration and export activities.”
2. Constellation Energy Corporation (NASDAQ:CEG)
Number of Hedge Fund Holders In Q2 2024: 71
Constellation Energy Corporation (NASDAQ:CEG) is one of the biggest clean energy companies in the US. Its power generation capacity currently sits at a whopping 32GW, out of which 90% is generated through clean energy. The firm serves the needs of some of America’s largest states, such as New York and Pennsylvania. Constellation Energy Corporation (NASDAQ:CEG)’s energy generation profile, which is primarily geared toward nuclear energy can lead to significant headwinds in the future. This is because, unlike solar and wind power, nuclear is able to provide baseload electricity as the plants can run 24/7. For Constellation Energy Corporation (NASDAQ:CEG), it means that the budding demand for AI can see data center companies rush toward it since data centers also require an uninterrupted electricity supply. One key way through which the firm can benefit from this is by locking in contracts with high per unit prices that are based on today’s demand. Yet, at the same time, this catalyst could turn into Constellation Energy Corporation (NASDAQ:CEG)’s biggest headwind if the demand for AI doesn’t materialize and the potential that’s priced in the stock is priced out.
Constellation Energy Corporation (NASDAQ:CEG) shared insights into how it’s managing the expected data center demand. As per the firm:
“I understand why there is a lot of attention on that, but we don’t want to leave this topic without saying that we are making great progress on power sales for on grid data centers through our 24/7 product. Utilities across PJM, and I think you’ve seen this in a bunch of the earnings calls, have been highlighting the growth of data centers in their service territory. In total, as you could see on Slide 6, they now identified 50 gigawatts or more that would come in over time. Now look, in fairness, I think there’s a bunch of duplication in those numbers and it’s going to occur over a longish time line. But the point is, I think it’s powerful that everyone is seeing the same thing, growth in this area. And those growth opportunities are good for Constellation because each of these grid data center projects, whether they’re located in Illinois, Ohio or anywhere else in PJM or in other regions, they present an opportunity for our commercial team to sell clean and reliable power through our 24/7 product and other offerings to these clients.”
1. NextEra Energy, Inc. (NYSE:NEE)
Number of Hedge Fund Holders In Q2 2024: 73
NextEra Energy, Inc. (NYSE:NEE) is a clean energy company that generates 33GW of power through solar, nuclear, wind, and other sources. Over the past year, its shares are up by a modest 23.77% which is unsurprising. Firms like NextEra Energy, Inc. (NYSE:NEE) depend on low interest rates to finance their clean power generation projects, and higher rates led the firm to cut its distribution per unit growth to 5% to 8% in September 2023. This meant that investors jumped ship as they sought other avenues for return. Additionally, just like Constellation Energy, NextEra Energy, Inc. (NYSE:NEE)’s clean energy model is attractive to the AI industry as it requires massive power but with a low carbon footprint. This has led to tailwinds this year, with the shares having gained 37.31% year to date. Looking ahead, rate cuts should prove beneficial, and NextEra Energy, Inc. (NYSE:NEE) also benefits from strong cost management at its Florida subsidiary which has allowed the firm to keep bills 40% below the national average.
During the Q2 2024 earnings call, NextEra Energy, Inc. (NYSE:NEE)’s management shared details for a bit data center deal:
“A great example is our collaboration with Entergy, where we are targeting to build 4.5 gigawatts of renewable storage solutions to help them meet both their new increased load demand and energy transition goals. And we couldn’t be more excited to work with a long-term established customer in order to help them execute on these goals.
Another example is our collaboration with Google. As John said earlier, this quarter’s backlog addition include 860 megawatts signed with Google to support their data center needs. That brings our total renewables portfolio with technology and data center customers, including assets in operation and in backlog to 7 gigawatts.”
NEE tops our list of hedge funds’ best infrastructure stocks. But our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NEE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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