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The US stocks to benefit from the current power struggle

22 September 2022

Cormac Weldon asks if investors can make money from America’s power struggle?

By Cormac Weldon ,

Artemis Investment Management

The US is in a power struggle – and not a political one. Like most countries, it is working out how to transition to a low-carbon economy. It is spending trillions of dollars in the coming years to meet this challenge.

Many of the businesses engaged in this massive undertaking are ‘smaller’ companies – an area of the market that represents unusual value at the moment. Can you profit from investing in these companies and help save the planet at the same time?

We believe you can. The following are not investment tips but do illustrate how we are playing this theme within our smaller companies portfolio.


NextEra Energy Partners (NEP) is the largest operator of renewable capacity in the US. The Florida-based company owns and manages clean energy projects and has interests in wind and solar projects across the US.

NEP is owned by NextEra Energy, Inc. – the world’s largest utility company and one of America’s biggest capital investors in infrastructure. The sole focus of NEP is on renewables, which means it can access additional funding that the parent company cannot, allowing greater opportunities for growth.


It became clear earlier in the year, as we considered the broader impact of geopolitical events on energy production, that nuclear energy would become a less toxic part of the transition to alternatives.

In California, for instance, legislators are trying to extend the life of the state’s last operating nuclear plant beyond its scheduled closure in 2025. Nuclear assets may have a longer life than the market thinks.

We recently bought Constellation Energy, after it spun out from its parent company. Constellation is responsible for producing 10% of carbon-free electricity in the US and supplies energy from nuclear, wind, solar and hydro plants. It is a strong acquirer of other nuclear businesses and is now responsible for about 20% of nuclear capacity in the US.

The recently passed Inflation Reduction Act includes a production tax credit for nuclear power generators within its $369bn investment in the climate and clean energy. The government has put a floor on the price of nuclear and solar power, which removes significant downside risk from our investment in the company.


The new energy grid will need infrastructure. There is a requirement for utility companies in areas that are prone to natural disasters to upgrade their connections to the grid. California, for example, is particularly susceptible to wildfires, which are likely to become increasingly common. Analysis by McKinsey suggests that over the next 25 years or so the typical US utility could suffer around $1.7bn in costs and lost revenues due to storm damage.

The local utility in California has decided to move power lines that run through particularly sensitive areas underground. One of our holdings, Jacobs Engineering, does all the planning, sorts the permits and then organises the digging. It may not sound very sophisticated, but it takes coordination and logistical expertise.  

Another company, Valmont Industries, provides the infrastructure to connect new solar or wind farms to the grid. One of its divisions also provides irrigation equipment, helping farmers around the world maximise the return per litre by providing precision technology that reduces the use of precious water. It is also helping reduce use of chemicals and fertilisers.

Valmont is a company that we have held for a while. We have added to the holding when the stock has underperformed in recent months. This brings me to an important point. Many of these companies are small by US standards (though large in comparison to many companies in the UK – Valmont is a $5bn company, which would comfortably make it a FTSE 100 company here).

‘Small’ US companies have had a tough year in the markets. I cannot remember many occasions – perhaps only one or two – in the past 30 years when they have presented such good value relative to their larger counterparts.

Our smaller companies fund is currently trading on a price-to-earnings (P/E) multiple of about 15.5x (trailing) – broadly in line with its Russell 2000 benchmark – versus about 24x for the S&P 500. You have to go back to 1999 to find US small caps as cheap, relatively speaking.

Historically, smaller companies have traded on a premium because their prospective earnings growth rate tends to be quite a bit higher than that of large companies. And active management can enhance that further. The fund has a similar P/E to the benchmark but has a return on equity of 17-18% versus 5% for the benchmark.

Returning to the relative valuations between large-cap and small-cap companies, why is the small-cap market so heavily discounted? Many smaller companies struggled during the Covid pandemic. They survived the journey across that terrain, only to find themselves in another tough environment ¬– facing inflation and rising interest rates. This is making investors nervous. The Fed has led the world in ratcheting up interest rates to rein in inflation. The concern is that in the process it will drive the economy into a painful recession.

The economic environment does appear to be improving. Bad expectations feel largely priced in, and this valuation opportunity may be short-lived.

Unfortunately, the wider environment is not improving, as this year’s weather calamities have underlined. Companies in the clean energy transition space have the wind – or some other renewable energy force – behind them.

As long as they can maintain their distinct offerings and reinvest for growth to protect their niche, they should thrive, seeing off larger companies that might otherwise nibble away at their business.

Forgive the inappropriate analogy, but I fear that the scale of the climate challenge means we could be mining this seam for some time.

Cormac Weldon is head of US equities at Artemis Investment Management. The views expressed above should not be taken as investment advice.

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