Utilities are almost as big an AI play as tech: Strategist

Although the tech sector (XLK) has suffered in recent weeks, there are plenty of investing strategies and plays that could help investors find their footing amid trending volatility.

Morningstar Chief US Market Strategist David Sekera joins Market Domination to give insights into current market trends.

Sekera points out how utilities (XLU) may be an undervalued sector: "On a valuation basis, [utilities were] pretty much as undervalued according to our valuations as they had been over the past decade. But that sector is up about 22% year to date, or even more than that off of those lows from last October. So, at this point, I think it's time to move to an underweight there."

Tying utility demands back into AI, Sekera finds utilities to be "the big story this year" as the sector becomes more like a "second derivative of AI.

"Of course, electricity demand will be increasing as more AI comes out there because AI takes many times more power to run than traditional computing," Sekera says.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video Transcript

There are two groups that you are underweight and that I want to dig into one is technology and the other is utilities.

And I mentioned them both in the same breath because they've sort of gone hand in hand very unusually this year.

Uh But you think it's time to, to pull back on those two groups.

Exactly.

So with technology, I just think that too many of these A I stocks ran, you know, too far, too fast here in the short term, they've definitely gotten to be overextended and in many cases, you know, overvalued in our mind.

So in that sector, you know, I would look to take profits out of there, you know, look for some of the other names that have lagged behind, but the utility sector is actually in my mind even more interesting, you know, from a negative point of view today, you know, that sector, I mean, it was just crashing last fall when interest rates were going up.

In fact, we noted that, you know, the utility sector on a valuation basis was pretty much as undervalued according to our valuations as they had been over the past decade.

But that sector is up, you know, about 22% year to date, you know, even more than that, you know, off of those lows from last October.

So at this point, I think it's time to move, you know, to an underweight there.

You know, the big story this year has been that utilities really are kind of that, you know, second derivative on A I, of course, electricity demand will be increasing as more A I comes out there because A I takes many times more power to run than traditional computing.

But I'm just thinking right now, if you're buying utilities based on that theme, we think you're 10 months too late to the trade.

So now is a good time to be making some swaps getting out of those overvalued utilities like, you know, Southern Company and Dominion Energy two stocks that we rate, you know, with two stars and look for the more undervalued ones out there like evergy.

You know, that's a four star rated stock trades at an 8% discount.

Uh And nice source would be another one that's a four star rated stock trades at a 5% discount.

How about small caps, David?

They look interesting to you here.

Exactly.

You know, small caps when we look at them relative to the overall market are trading at, you know what we think are some of the lowest valuations on a relative basis, you know, that we've seen over the past decade.

In fact, right now, the small cap category is trading at about a 16% discount to a composite of our fair values.

So I think there's a lot of opportunity, you know, in small caps plus it just even away from kind of that, you know, fundamental basis, you know, small caps historically have trading, you know, very well in times when interest rates are declining and the fed is easing.

So I think we're gonna have some good positive technicals there as well.

David.

Thanks so much.

Good to see you.

All right.

Well, thank you.