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Valuations in the Energy & Utility Sectors


The Energy and Utilities sectors have dominated news cycles over the past few months. From speculation on renewables in late 2020, to utility concerns, to Bitcoin mining; energy production and use remain mainstream topics even though they represent small portions of the overall stock market. Applied Finance will highlight recent events, their impact on the market, and review current Valuations in the Energy and Utility sectors relative to the overall indices.

Texas Winter Events

In February 2021, Texas experienced super abnormal freezing temperatures that strained energy markets across the state. Three consecutive winter storms caused natural gas and wind turbine equipment failures and led to roughly 4.5 million homes and businesses without power for days. For a short period, temperatures in Dallas, Austin and San Antonio were colder than Anchorage, Alaska. The blackouts are estimated to have caused $195B in damages, making them the most expensive energy event in Texas history.


The aftermath led to debates on the de-regulated Texas market, the role of the Electric Reliability Council of Texas (ERCOT), and spending packages aimed at preventing similar incidents. Although much has been done so far, strong government funding in Texas and across other states will be necessary in the near future to prevent further disasters.


On May 7th, the Colonial Pipeline, one of the major carriers of fuel for the east coast, was hit with a cyberattack that disrupted operations and halted gas supplies to millions of customers from Florida to New York (see chart below). This attack follows the 2020 SolarWinds hack that affected many government organizations and has raised questions on infrastructure security across the US. Similar to the Texas winter storms, this event could lead to increased public funding in the upcoming years.


Bitcoin Mining

With the rapid price appreciation over the past year, Bitcoin once again dominates news cycles. One of the largest conflicts within the crypto community to arise has been the debate over mining environmental and energy concerns. This was brought to the forefront in mid-May by a tweet from Elon Musk:

In a follow up, Musk continued to state that energy usage from Bitcoin mining has expanded exponentially. Although carbon emissions from crypto mining are difficult to track, “Bitcoin’s energy consumption is relatively easy to estimate: You can just look at its hashrate (i.e., the total combined computational power used to mine Bitcoin and process transactions), and then make some educated guesses as to the energy requirements of the hardware that miners are using”, according to an article in the Harvard Business Review.

The Cambridge Bitcoin Electricity Consumption Index is one tool that tracks Bitcoin energy consumption over time. The three lines below represent the Estimated, Lower and Upper bounds of consumption.


Without speculating on the long-term survival/price of Bitcoin, one thing we know for sure is that its energy use has dramatically increased. Current estimates are that Bitcoin accounts for 0.52% of all electricity consumption worldwide. While Bitcoin’s electricity usage has increased over the years, US overall demand has remained relatively constant during the same timeframe. Although the future transaction characteristics and power demands of Bitcoin are unknown, the power statistics are something important to monitor. If the past dramatic growth in consumption continues, it could affect public policy in the future.

Other Recent Headlines & Government Reaction

In the final week of May, a handful of climate change headlines affected dominant companies, including:

In the face of all of these events and headlines, it’s easy to become overwhelmed at what the future of energy could hold. One outcome that we know for certain however, is that public spending in the near to intermediate term will be abundant. The Biden administration recently released a massive $6T budget proposal with projections over the next 10 years. A few key items include:

  • $36B in investments to directly combat climate change
  • A portion of the $171B R&D spend allocated to new energy development, including $10B in clean energy innovation funds to non-defense agencies
  • $750M to agencies affected by recent cyber-attacks

Applied Finance Data

Applied Finance believes that Valuation metrics provide strong anchors for investors in ever changing macro environments. Using over 20 years of live, point in time data, we can examine the Valuation characteristics of both indices and sectors over various periods.

Before diving in, it’s worthwhile to note that the Energy and Utility sectors are both quite small compared to the overall large and small cap indices (despite the prevalence of front-page stories):

Applied Finance Database: Market cap percentages in US Dollars, data as of 5/31/21

Applied Finance tracks a number of country, index and sector data points on an ongoing basis. One set of data that can be used to gauge relative attractiveness on a sector basis is to look at the implied expectations across a broad range of stocks. The chart below measures the current Economic Margins (Applied Finance’s proprietary corporate performance measure) of sectors relative to the Implied Margins given current prices. Sectors with low differences between implied and actual data can be seen as attractive, while sectors with high differences can be seen as unattractive. Below we can see that the Energy and Utilities sectors both appear attractive on a relative basis within the Russell 3000.

Applied Finance Database, data as of 5/31/21

The Applied Finance database also tracks aggregate Valuation data over time. In the charts below, we plot the median upside/downside, on a normalized basis, within each index and sector from September 1998 to May 2021. Furthermore, we show upper and lower bounds for 1.5 standard deviations to create a “zone of reasonableness” for Valuations. From the data, we can see that the Russell 1000 and 2000 currently look expensive, compared to historical values.

Applied Finance Database: 9/30/98 – 5/31/21, Median Valuation based on Applied Finance Intrinsic Value
measures on a normalized basis,
sector data based on Applied Finance sectors.

Focusing on sector data, both large cap and small cap Energy stocks actually look attractive relative to the overall market as both sector datasets are within their normalized ranges while the indices are below our 1.5 standard deviation level.

Applied Finance Database: 9/30/98 – 5/31/21, Median Valuation based on Applied Finance Intrinsic Value
measures on a normalized basis, sector data based on Applied Finance sectors.

Finally, large cap Utilities look mildly attractive relative to the market, while small cap Utilities look a bit expensive and similar to the index.

Applied Finance Database: 9/30/98 – 5/31/21, Median Valuation based on Applied Finance Intrinsic Value
measures on a normalized basis, sector data based on Applied Finance sectors.


Although the Energy and Utilities sectors represent only a small portion of the overall stock market, they have an outsized impact on people’s every day lives and have been dominant in recent news cycles. While there have been many negative headlines over the past few weeks, and although the future is uncertain, one guaranteed outcome will be strong public spending into the sectors.

Looking at the most recent aggregate Valuation data, both the Russell 1000 and Russell 2000 look expensive relative to their long-term levels. On a sector basis, large and small cap Energy stocks, and large cap Utility stocks all seem attractive, while small cap Utilities appear expensive. Applied Finance will continue to keep a close eye on updates to the Valuation data as the year progresses.

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  • John Holt, CFA joined Applied Finance in 2014 and is involved in the management of both quantitative strategies and analyst driven strategies.


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