We recently compiled a list of the 10 Best Infrastructure Stocks To Buy Now. In this article, we are going to take a look at where The Williams Companies, Inc. (NYSE:WMB) stands against the other infrastructure stocks.
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.
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).
A bird’s-eye view of an oil & gas midstream platform in the Gulf of Mexico on a clear day.
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.”
Overall WMB ranks 8th on our list of the best infrastructure stocks to buy. While we acknowledge the potential of WMB as an investment, 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 WMB 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 at Insider Monkey.