We recently compiled a list of the 10 Best Growth Stocks to Buy According to Billionaire Dan Loeb and in this article we will discuss the activist investor’s position in Vistra Corp. (NYSE:VST).
Billionaire investor Dan Loeb’s hedge fund Third Point had a strong start to 2024 after its offshore fund posted returns of 7.8% in the first quarter chugging along with the broader market’s 10.6% gain. AI has been one of his top investing themes for some time now and the activist shareholder maintains his bullish view on the technology. In the first quarter, he initiated a position in Alphabet and also increased his position in Amazon by 22% to about $920 million.
Loeb Thinks This Company’s Capital Allocation Strategy is “Brilliant”
Loeb’s also bullish on the energy transition and one of his favorite stocks that is expected to benefit from the AI-driven electricity demand is Vistra, one of the largest independent power producers and retail electricity providers in the US. Though the power company’s core markets have experienced volatility due to weak domestic electricity demand, its “capital allocation strategy has been brilliant”, he stated in his Q1 2024 letter to shareholders, seen by Insider Monkey. In the weak demand environment for fossil fuels, The Texas-based energy group made smart moves by shutting down its unprofitable coal plants and instead buying back 33% of its shares between 2018 and 2023. Additionally, its acquisition of nuclear generation assets of Ohio-based energy company, Energy Harbor, was right on time as governments are turning to nuclear fuel sources to meet the world’s growing energy demands. Loeb expects Vistra to be a direct beneficiary of AI-driven electricity demand and is bullish on the company’s unique position of holding both renewable and fossil fuel-based assets under its belt.
Loeb’s Bullish on LSEG, and For Good Reason
Another AI play Loeb is increasingly bullish on is UK-based stock exchange and financial data company London Stock Exchange Group. The activist investor likes the company’s unique market position as a data provider that is democratizing and making financial data accessible to consumers without the use of additional third-party software. He sees London Stock Exchange Group benefitting from generative AI as information retrieval systems in financial services become more powerful. He also expects the company to develop “a powerful Research Assistant application” with Microsoft to reduce both human resources and time needed to process financial data. He thinks London Stock Exchange Group is at the forefront of capitalizing on the transition of the financial services industry “from manual data processing via clunky desktop terminals to machine-assisted data processing”.
A bird’s eye view of a power generation platform with a power plant in the background.
Our Methodology
We scanned Third Point’s Q1 portfolio and picked growth stocks from the fund’s top 13F holdings. Additionally, we’ve also added overall hedge fund sentiment, as of Q1 2024. 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).
Note: All pricing data is as of June 6.
Dan Loeb is Bullish on This Growth Stock
Vistra Corp. (NYSE:VST)
Third Point’s Stake Value: $311,335,500
Number of Hedge Fund Holders: 79
Vistra Corp. (NYSE:VST) is a power generation company that is also involved in electricity generation and wholesale energy purchases and sales. The company has about 5 million customers and operates a 41,000-megawatt portfolio of natural gas, coal, nuclear, and solar assets, as well as battery storage facilities. We discussed above why Loeb’s bullish on Vistra Corp. (NYSE:VST) and how the company stands to benefit from AI-driven electricity demand and also the shift to electric vehicles. Third Point Management stated the following regarding Vistra Corp. (NYSE:VST) in its first quarter 2024 investor letter:
“Vistra Corp. (NYSE:VST) is one of the largest independent power producers (“IPPs”) and retail electricity providers in the country. In 2023, Vistra’s natural gas, nuclear and coal plants generated over 20% of electricity consumed in Texas.
Unlike regulated utilities, where profits are determined by capital invested, Vistra operates in deregulated markets (primarily ERCOT and PJM), where they generate and sell electricity at market prices. Historically, Vistra has been valued at a steep discount to both the regulated utility sector and the broader market in part due to the challenging fundamentals of merchant power. Stagnant domestic electricity demand combined with an oversupply of natural gas has made US electricity prices among the lowest in the world. Meanwhile, significant growth in subsidized renewable generation has created major intraday price volatility in Vistra’s core markets, with power prices sometimes going negative during periods of abundant sunshine or wind. Bankruptcies, including Vistra’s former parent company TXU in 2014, have become commonplace in the sector over the last decade…” (Click here to read the full text)”
But why is Vistra Corp. (NYSE:VST) particularly on Wall Street’s radars (and it is)? In Q1, 79 hedge funds held positions worth $3.32 billion in the company, up from 56 positions in the preceding quarter with stakes worth $1.30 billion. Analysts and investors have been touting the stock as a “hidden AI play”, and think it’s among the top beneficiaries of power demand from data center hyperscalers and generative AI applications. Wall Street’s interest spiked after the company closed its acquisition of Ohio-based Energy Harbor (operator of the second largest non-regulated nuclear fleet in the US) in March for $3.43 billion.
Guggenheim analyst Shahriar Pourreza who holds a Buy recommendation and a Street-high price target of $133 on Vistra Corp. (NYSE:VST) thinks the company is a “unicorn” for its portfolio of both gas and nuclear power plants. Pourreza further said in his note to clients that data centers are exploring 24-hour power sources that are clean and “nuclear plants are a very strong avenue for that”, further adding to his thesis for the stock.
Analysts and investors expect Vistra Corp. (NYSE:VST) to follow suit and pen contracts with hyperscalers, similar to those done between Constellation Energy and Microsoft for nuclear power back in June 2023 and Amazon’s 10-year power agreements with nuclear energy producer Talen Energy. Vistra Corp. (NYSE:VST) is one of Dan Loeb’s top growth stocks picks.
Is it too late to get in on the VST action? Before we answer that, here are some quick facts: Over the past 10 years, Vistra has grown its revenue by 8.1%, however it has struggled with profitability due to its unprofitable coal operations (which it shut down in 2022). After reporting losses for several years up to 2022, the group swung to a profit in 2023 ending the year with a net income of $1.34 billion. Analysts anticipate VST to grow its EPS by 45% in 2024. Over the past 12 months, VST has gained 243% and the Street’s median 1-year target implies an upside of 33%. We think VST is worth exploring as it trades at 19 times its forward earnings, lower than peers Bloom Energy (PE of 131.5x) and Constellation Energy (PE of 27x), and stands to capitalize on favorable power demand trends from hyperscalers, generative AI, and electric vehicles.
Vistra Corp. (NYSE:VST) ranks 6th on our list. To discover Dan Loeb’s top growth stock picks, check out our free report on of the 10 Best Growth Stocks to Buy According to Billionaire Dan Loeb.
If you are looking for an AI stock that is more promising than Micron but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure. None. This article is originally published on Insider Monkey.