Why Constellation Energy Rallied in October

Shares of independent power producer Constellation Energy (NASDAQ: CEG) rallied 14.6% in October, according to data from S&P Global Market Intelligence.

Constellation didn't report earnings during the month; that will actually happen today. However, enthusiasm over the AI build-out grew in October, while analysts picked Constellation as a top power producer, given its leading nuclear fleet and impending $16.4 billion acquisition of Calpine.

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A busy October boosts confidence in growth

Early in the month, Constellation reached a historic agreement with the state of Maryland to invest $340 million in environmental remediation. While that $340 million is a cost to Constellation, it cleared the way for a long-term relicensing of its geothermal power output from the Conowingo Dam.

While the Conowingo Dam announcement was a positive for an existing asset, Constellation's growth outlook brightened as well. In late October, the Donald Trump administration formally encouraged FERC (Federal Energy Regulatory Commission) to expedite reviews for data center grid connections, in order to speed up the deployment of power production for AI data centers.

The order is meant to boost the growth prospects of the whole power generation and utility industry, which has long been known for its stability, but low growth. Yet now with the acceleration in power demand coming from the AI buildout, the sector is finding more favor among growth investors.

On that note, toward the end of the month, sell-side analysts at Wells Fargo, led by Shahriar Pourreza, wrote a highly bullish note on the entire sector. Pourreza and his team wrote "this is not a fad," implying the recent boost in utility growth prospects is not a short-term cycle but rather a longer-term secular trend, elaborating, "growth is non-cyclical and represents a structural change that is the engine behind utility and IPP (independent power producer) growth."

And on that note, Pourreza named Constellation his top pick for IPPs, with Sempra Energy (NYSE: SRE) as his best utility idea.

Investors stay tuned for more on Q3 earnings

Third-quarter earnings will be reported today, and investors will begin to learn more about those very growth prospects. That will include a proposal Constellation unveiled earlier this week to invest in up to 5,800 MW of new clean power in Maryland, comprising battery storage, gas plants, nuclear, and hydroelectric.

In addition, investors should look for commentary on the impending Calpine acquisition, and how management intends to absorb those assets, which are primarily natural gas and geothermal facilities. Wall Street was very bullish on the deal when it was announced, as Constellation rose some 20% on that day. The acquisition is supposed to close this quarter, leading to even more growth for the power producer.

All of this recent news has been exciting and positive, but investors looking to buy shares won't get them cheap. Constellation trades at 38 times trailing earnings and 32 times forward earnings. So, at least some of those growth prospects Wells Fargo discussed are factored into shares today.

Wells Fargo is an advertising partner of Motley Fool Money. Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Constellation Energy. The Motley Fool has a disclosure policy.