Transcription
By 2030, the US alone needs to triple grid investment just to keep the lights on for AI. While everyone's out there chasing the latest AI trade, the real bottleneck is electricity transmission and distribution. Just take a look at this chart from a recent video we did on the explosive demand for copper.
Now, copper's essential for electrification. It's a fundamental irreplaceable material for power generation, transmission, and storage. And the need for copper is expected to grow by 50% over the next 15 years. 30% of that demand comes from what they refer to as core economics. So business as usual in society, construction, things like that. But half that demand is driven by electrification. So what does that mean? Well, when we drill further into that, we see three components. You have TND, which is transmission and distribution. You have electric vehicles, and then you have clean tech.
So, a key driver of the demand for copper is transmission and distribution. The reason for that is that global demand for electricity as an energy source is expected to grow much faster than all other forms of energy. You can see that here in this chart out to 2040. Global electrification is the biggest contributor of energy demand over the next 15 years, says S&P Global. Other sources say the same thing.
Now, this is very important to note. The electrification thesis that we're talking about today extends well beyond the next decade. For example, you could invest over the next five years and then still have a decade to realize the maturity of that investment. During that time, you could have a potential crash in AI hype, a recession. It doesn't matter. There's still going to be that need for electricity, right? This isn't just about AI. It's very important to note here. The AI trade could come and go, and we're still going to have this strong demand for electrification. AI only accounts for 10% of that increase in demand that we're expected to see.
So, we've managed to find a handful of solid, relatively safe, pure play ways to play transmission and distribution. Now, I know that some of you want me to immediately tell you the tickers so you can start stacking these asymmetric generational wealth opportunities, but hold your horses there, DJ Dave. First, I want to talk about the various ways you might want to consider getting exposure. The first would be through an ETF that provides pure play exposure to this theme at a reasonable expense ratio. The second way would be to find a handful of large leaders that provide, and this is important again, pure play exposure to TND. And then perhaps you could put yourself together a mini ETF or try to cherrypick a particular leader that you think will generate more alpha than the others. And then there's a third way, which is to potentially find a dividend champion that offers us exposure to electrification, the two birds with one stone approach.
Now, this is important. We want builders and suppliers of infrastructure, not operators. We don't want to invest in utilities. We want to find potentially a way to get better exposure to the growth on offer than a regulated utility company. That means that the firms we look at are likely to be more industrials and less utilities. Industrials will be more suited to offer the sort of growth opportunity that we want.
So, we can start with ETFs. What this allows us to do, we take this approach quite often. We find all the ETFs out there and then we canvas them to see what are the top names that these ETF providers agree upon. Since a lot of these are market cap weighted, those will usually be the leaders. Now, types of ETFs that you're going to come across when you're trying to put together a list is rather difficult. You have the mega build back better sort of stuff that ETF providers put together. US infrastructure ETFs, right, that uh canvas all kinds of stuff. You have electric grid growth ETFs with too much utility exposure, things that use the word energy too loosely and start to include oil and everything in between.
So I probed an LLM with a sufficient number of prompts to come up with the list that you see here, AUM alongside expense ratio. And this is a common exercise we perform manually. We go out there and take the top 10 constituents of every one of these six ETFs and then we see what names all these expert sources agreed upon. Technically, they should all pretty much agree upon the same set if it's clear. And the extent to which they don't tells you how difficult it is to find pure plays. And what I found when I ran this exercise against these six ETFs is that I needed to expand it to say, tell me all common names you found across all six ETFs in the top 15 constituents. Turns out in the top 15, not all six could agree on a single name. Four ETFs agreed that Quantis Services should be in the top 15. And then you can go down the list and see the other names here. But there's a problem. Remember I said we didn't want utilities? Well, Next Era Energy, the largest renewable energy provider in the world that we've been covering for a very long time, isn't within the scope of what we want to look at today.
So, we then want to remove utilities. And what we're left with here are four names that these ETF providers could relatively agree upon that provide us with pure play exposure to transmission and distribution. We have Quantum Services, Eaton, GE, Vernova, and Hubble. Six ETFs only have four names that these providers could agree upon. That's rather dismal. So far, not so good.
Now, this is the classic Gixs problem that you find with thematic investing. Gixs dices up all the companies in the world into sectors and industries and subindustries. And then what you can do is makes it very easy to set up a thematic because Gixs decides what companies ought to be in there. Since this is a very obscure niche sort of theme, right? transmission and distribution infrastructure, we need to do that manually. So what we can then do is start to leverage the power of LLMs and use a bottom up approach. So I went and asked three LLMs with a sufficient number of prompts, the same prompts applied across each LLM to give me such a collection of names. And the results are rather interesting. You see here, Grock coming up with Quanta, the clear number one leader. That's going to be a theme you're going to see today. And it lists some other names here. Masttec Myrr group and Hubble which is going to come up as well. When we look at Gemini's results again, Quanta at the top, GE Vernova and Hubble. Then we go to chat GBT and it says again for Quanta arguably the best grid buildout pure play. Wow. So all the LLMs seem to agree upon that.
What we can then do is say for that ETF scan that we did plus the three LLMs which companies were in common across all four and you see here Hubble and Quanta all four methods found those names and then two of the methods found Masttec and GE Vernova. So we have four names here that we're relatively confident that this objective method we used provides us with four ways to invest in transmission and distribution infrastructure. They're pure play. That's what's most important.
And when we pop open the investor deck for quant, it starts to get very interesting. You see here one of the first slides starts to talk about their earnings per share growth. So now we're talking value companies, right? Traditionally when we talk about growth, we look at price to sales. our own simple valuation ratio. Now, we're going to want to start talking in terms of earnings. All right. And what's cool about this company is that they give you visibility four years out. That's sort of how they run their guidance, right? When you have a very well-run company that controls their business quite well, they're able to give you that sort of visibility four years out into the future. Now there is a bit of country risk here because they seem to be dominating in North America as opposed to having global exposure. I think 50% of the demand for electricity going forward is going to come from China globally. But nonetheless, you see this second slide they have talking about how they delivered on their 2022 investor day targets a year ahead of schedule. So it seems to be a very well-run company. And then they push out their forecast to 2030 and they give you this adjusted earnings per share number. they're targeting and all these other key metrics right now because on the tin it appears to be a very well-run company and because there's a lot of hype around this theme relating to AI, not necessarily the broader electrification thesis because I'll bet if AI didn't pop up, people probably wouldn't have even noticed this, but it's commanding quite a rich valuation. You see here, stock price is rising, but earnings per share isn't rising fast enough. So, you have a PE ratio that's spiking there. What? Up to 80. Well, always calculate this stuff manually. Take the last share price 560 divide by earnings per share for 2026 estimated, you get 43. So the calculation you see here is trailing. The actuals for this year, you get 43. Then if you look at what they're targeting for 2030, essentially double earnings per share. We use that to get 21, a PE of 21. Well, that's about the average, right? So essentially this thing is priced for four years out of what they're expecting. Well, as I said earlier, remember we're talking about a 15year time horizon. What if you tacked on another decade to that? Now, regardless of how you want to spin that story, it seems that shares of this company are very rich and you would want to set some sort of cutoff based on what you're willing to pay. But remember, there are three other names we can vet here and start to look at comparative valuation. Are all four names we surfaced equally as richly valued? We'd have to look at that.
Now, one of these is particularly interesting. And I asked an LLM. I said, "Go out there and find me a dividend champion or the closest thing to one that provides me with that electrification transmission and distribution pure play exposure. Can you find one?" Well, multiple LLMs, all three surfaced two names. Hubble, well, that's one of our four, right? So that's good to know. Now it's not a champion. It's not even an upcoming. We consider upcoming 20 years increase in a row. This only has 18 years of increase in but it's 2 years away from going into our Quantagence universe. Interesting, right? And they also mentioned Eaton. >> He went to Eaton. >> Now Eton isn't a pure play. That's very important. When you want exposure to a theme, you want to get that actual exposure, right? You don't just want some hybrid exposure. or you want pure exposure to what you're looking for, right? And that brings up the topic of the usual suspect. So when I see conversations out there talking about energy infrastructure and this is one of the reasons why we did this presentation is people will always talk about Seammens or ABB or Schneider Electric. None of these are actually pure plays for transmission and distribution. As I said, it's very important we get exposure that we're looking for. Here an LLM has broken down the pure playness if you will of these three companies. You see for Schneider Electric 40% or lower, Seammen's 30% or lower and ABB 30% or lower. So the majority exposure you're getting isn't what you're looking for. Right?
So just some comments on this exercise. I was blown away by the ambiguity across all these sources. Right? So you would expect these ETF providers to be able to agree on what constitutes pure play exposure for grid expansion, let's say even X utilities, right? And they certainly couldn't. The AI expert sources also deviated a fair amount, though they all seem to pick those two names, right? Quanta and Hubble. Now Hubble seems to be very compelling as a upcoming dividend champion, right? Because you can kill two birds with one stone there. They have an 18-year track record. Now, we haven't validated that using our internal data sources, but that's what the LLMs tell us. That means it would potentially be added to our Quantigence universe in several years. Now, Quanta is very impressive on the tin, just browsing the first several pages there, investor deck, but it's also very richly valued, and that has to do with hype more than anything.
Now, does it make sense to create a mini ETF here to take those four names that we surfaced and purchase equal amounts of all four of them and see what happens over the next 15 years? That could be very interesting as opposed to purchasing one of these ETFs, which really gives you sporadic exposure at probably 50 basis points or half a percent, which is what you're going to pay on average for an active ETF. I think before being able to make that decision, we'd want to explore these five companies across numerous dimensions such as comparing their valuations, looking at their profitability metrics, looking at what exactly they do to try to understand that a bit better. And I think what we found quite interesting today is that LLMs seem pretty directionally accurate when it comes to identifying pure play stocks for particular themes which is really a challenge right in some themes like cyber security it's very easy you have choices left and right particular themes that are a lot more niche like transmission and distribution infrastructure and buildouts as opposed to operators that becomes more difficult right and LLM's certainly seem to have come in handy for helping us surface these four names.
Now, if you're a premium subscriber and you think that we ought to go down this path more and dig more into these four names, drop a note in our invite only discord server. We'll have a conversation about that. Now, another set of companies that we found in the semiconductor industry to create a mini ETF. We did a video on that. It's also quite interesting. Give that a watch next. Thanks so much for taking the time to watch this video today.