Top 7 Stocks for 2026

Welcome to Smart Money! My name is Eric Fry, and I’m glad you’re here.

Wall Street has sold investors on the idea that they should start with “micro” analysis – the idea that they should make investment decisions by comparing things like price/earnings ratios, income statements, or other company details.

But I do the opposite. I start with “macro” analysis.

I look for big-picture trends that drive huge, multiyear moves in entire sectors of the market.

I’m talking about trends that can spin off dozens of triple- and even quadruple-digit gains in just a few years.

Catching just one of these trends – at the right time – can help anyone accumulate enough capital to finance their dreams and  an enviable retirement…

When investors use a global macro strategy, they identify investment opportunities from a broad, global, top-down perspective, rather than by examining stocks one by one (a micro, bottom-up perspective).

And today, I want to highlight my Top 7 Stocks for 2026, each of which capitalizes on a powerful megatrend.

Let’s get started…

Top 2026 Stock No. 1: Deckers

In a stock market obsessed with AI — where every earnings call highlights new initiatives and any mention of a partnership with Nvidia or OpenAI sparks a huge, one-day bounce  — Deckers Outdoor Corp. (DECK) makes a quietly radical statement: It doesn’t need any of it. No AI factory. No GPU cluster. No agentic inference. Just two of the most culturally resonant footwear brands on earth, a best-in-class profitability profile, and a stock price that is still recovering from a growth scare that has largely passed.

This corporate profile is a textbook example of what I call an “AI Survivor.”

The Cultural Case

Start with UGG, which has pulled off one of the more remarkable brand resurrections in recent consumer history. A decade ago, many fashionistas wrote off UGG as a relic — the sheepskin boot from the early 2000s that “celebutantes” like Lindsay Lohan and Paris Hilton would wear on a jaunt to Starbucks. But this “relic” has defied the skeptics. It has embarked on a full-scale cultural revival, powered by Gen Z’s appetite for Y2K nostalgia and comfort-first styles.

Several recent fashion shows from top designers have featured UGG boots, while a diverse variety of “it” actresses, models, and rappers have been out and about in this distinctive footwear. Chloë Sevigny sported a pair of UGGs in a MYTH magazine cover shoot performance in 2024. Dua Lipa rocked an UGG-Palace collaboration with a $12,000 Hermès Birkin the same year. In 2025, Rihanna wore elaborately embroidered UGG-Palace slippers.

If, like me, these celebrity names do not roll off your tongue in everyday conversation, don’t worry about it. You and I are probably not in the bullseye of UGG’s target market. According to the Ad Age-Harris Poll trackers, UGG topped the Gen Z brand rankings in the first quarter of this year.

Then there is HOKA, which tells a different but equally compelling cultural story. HOKA sits at the intersection of two powerful trends: the mainstreaming of performance footwear into lifestyle fashion, and the unstoppable growth of the running category globally. Neither trend shows any sign of slowing.

Fashion trend analyst Seb Beasant, writing in early 2026, noted that “brands such as ASICS, Salomon and HOKA paved the way with styles that take design cues from performance footwear, but remix them for daily urban wear,” adding that “there was no disputing the popularity of the HOKA Bondi and Clifton in recent years as everyday shoes.”

In the overall U.S. running shows market, HOKA and Brooks share the lead with a 23% share. However, in the premium segment – shoes that cost more than $140 – HOKA’s share has increased significantly in the three months ending December, according to CEO Stefano Caroti.

In Europe, top strategic wholesale customers are averaging 90% sell-through rates, fueling record levels of reorders. In Asia, the company has barely scratched the surface of what it believes is possible. Caroti’s summary on the January earnings call was understated but pointed: “We have visibility to continue growth both domestically and internationally.”

The Business Case: Numbers That Don’t Fit the Valuation

Importantly, Deckers is converting its cultural appeal into cold, hard cash. The most recent quarter delivered record revenue of nearly $2 billion, record EPS of $3.33, and HOKA growth of 18.5%. The company raised full-year guidance on both revenue and earnings. Operating margins stand at 23.8% — best in class by a significant margin. For context, Nike Inc. (NKE)’s margins have tumbled to 6%, while those of On Holding AG (ONON), a HOKA rival, run at 12.5%.

The free cash flow picture is equally impressive. The company will finish the fiscal year with approximately $1.2 to $1.3 billion in free cash flow, after already producing more than $1 billion in the first nine months. At the current share price, that represents a free cash flow yield of approximately 6.7%, which is exceptional for a company growing revenue at high single digits with expanding margins and two brand franchises that are gaining cultural relevance.

Additionally, Deckers possesses a fortress-like balance sheet with more than $1.5 billion in net cash. Management plans to use a large chunk of that cash, along with ongoing free cash flow, to conduct an aggressive share buyback program. The company is on track to buy back more than $1 billion of stock in the current fiscal year alone — more than 5% of shares outstanding.

As CFO Steve Fasching stated on the January earnings call, “Given our strong cash flow and cash balance, and in consideration of the current market valuation, we remain committed to continue returning value to shareholders through our share repurchase program.”

Yet, despite the company’s strong momentum, Deckers’s stock valuation at 14 times earnings is far below peer group norms. Returning to On Holdings and Nike, Deckers is selling for less than half the valuation of either company, even though its operating margins are significantly higher.

Looking ahead, Deckers is on track to post earnings per share of about $7.35 in 2027, and about $8.20 in 2028. If the company hits those targets, its stock would likely “re-rate” to a much higher valuation. A 50% gain within 12 months would be very doable, and a double within two years would be well within reach.

Top 2026 Stock No. 2: Alcoa

If power is the blood circulating through data center infrastructure, metals are the bones.

In effect, every ton of metal pulled from the ground is a claim on the AI buildout.

Unlike software-as-a-service (SaaS) vendors or chip designers, metals companies don’t need to guess which AI model wins or which agent framework dominates. They just need to deliver the raw materials that make the entire ecosystem possible.

Aluminum demand is accelerating. Every high-voltage line that feeds an AI data hub consumes one to two tons of aluminum per megawatt delivered. Each new stretch of long-distance transmission deepens the world’s appetite for this versatile metal. From 104 million tons of demand in 2024 to an estimated 120 million by 2030, global aluminum consumption is set to grow almost as relentlessly as copper’s.

That spells good news for Alcoa Corp. (AA), the largest U.S.-based aluminum producer.

Toward the end of 2025, Alcoa’s prices reached a new three-year high. After suffering a tariff-induced selloff earlier in the year, Alcoa’s shares have been trending higher, and I expect that uptrend to gain momentum – driven not only by firmer aluminum prices, but also by the company’s exceptional fundamentals.

Alcoa is not just the largest American aluminum producer, but it is also among the world’s most environmentally progressive. Producing aluminum requires immense amounts of electricity, and that energy intensity is reshaping the industry.

Increasingly, companies such as Tesla Inc. (TSLA) are seeking to source their aluminum from clean-energy smelters powered by hydro, nuclear, or renewables. That shift is elevating low-carbon producers like Alcoa and Norsk Hydro ASA (NHY) to the top tier of the aluminum world.

Today, renewable energy powers roughly 87% of Alcoa’s smelting operations and about 70% of Norsk Hydro’s. This alignment with the global push toward decarbonization gives both companies a durable strategic advantage, and positions them not merely as metal producers, but as critical enablers of the cleaner, more electrified world AI will depend on.

In the end, the market may reward not those who build the virtual world, but those who power it. The data revolution will always need its dreamers, but it will depend on the miners that turn metal into the blood and bones of artificial intelligence.

In the race for AI supremacy, the hyperscalers may scorch their balance sheets, but the miners will still be cashing the checks. While hyperscaler shareholders wrestle with wafer-thin cash cushions and swelling debt, the power and metals firms operate with clearer economics.

Their business models are not theoretical. They are measurable and proven.

They don’t need to care whether GPT-7 outperforms Gemini Ultra or whether OpenAI’s next model hallucinates less than Anthropic’s. They get paid every time a new data hall lights up, every time another transformer hums, every time a ton of copper vanishes into a conduit.

Therefore, for investors seeking exposure to the AI Revolution without betting on which version of intelligence wins, a mining company like Alcoa offers a compelling opportunity.

Top 2026 Stock No. 3: Savers Value Village

Thrifting is “all the rage” among Generation Z. Two out of five items in the average zoomer’s closet are secondhand.

That’s the first reason to consider investing in Savers Value Village Inc. (SVV), but far from the only one. As the largest “for-profit” thrift store operator in North America, the company is perfectly positioned to capitalize on the Gen Z thrifting phenomenon.

Savers Value Village didn’t simply bolt a thrift operation onto a traditional retail model. It has specialized in thrifting since 1954, when founder William Ellison opened the first Savers store in San Francisco. The idea was radical for the time: partner with local nonprofits to collect donations, pay them for the goods, and then sell those goods in a clean, organized retail environment.

For decades, the company quietly grew under private ownership – expanding across the U.S., into Canada, and eventually into Australia – while perfecting the operational model. The stores never looked like the musty thrift shops of old. They looked like real retailers: wide aisles, sorted racks, organized departments.

By the 1990s and 2000s, Savers had become the largest for-profit thrift chain in North America, with a business model that turned donations into both community funding and shareholder returns.

Today, Savers Value Village runs 300-plus stores across the U.S., Canada, and Australia, is staffed by over 22,000 team members, and processes billions of pounds of donated goods annually. What looks simple on the sales floor is the product of 70 years of supply-chain engineering.

To support its business, Savers has built one of the most creative and durable sourcing models in retail. For example, the company pairs nearly every Savers store with a Community Donation Center (CDC).The company’s nonprofit suppliers use these on-site donation centers to drop off used clothes, shoes, books, and household goods.

Unlike charities that simply accept items, Savers pays its suppliers by the pound for these donations. As a result, local charities get steady funding without the overhead of running stores, while Savers secures a consistent stream of inventory.

In select markets, Savers supplements CDCs with GreenDrop donation stations. These freestanding pods or trailers extend the network and make donating easier.

After Savers collects these donations, its employees sort, price, and rack the sellable items. Merchandise hits the floor fast and cycles through quickly. Products that don’t sell at retail are bundled and resold into the global wholesale reuse market. That “multi-exit” monetization process converts “waste” into incremental revenue.

This model means Savers doesn’t rely on closeouts or liquidation deals. It owns its supply chain, from the donation bin to the cash register. That’s why it can keep prices dramatically below discount retail – 40% to 70% lower, according to management’s checks.

The Moat: Industrial-Scale Treasure Hunting

Thrifting has always been about the “hunt.” What Savers Value Village has done is industrialize the hunt without killing the fun.

• Frequency and freshness. Savers cycles through its inventory about 15 times a year, which is an extraordinarily rapid rate. That’s nearly double Walmart Inc.’s (WMT) inventory turn and about five times faster than Lululemon Athletica Inc.’s (LULU). Effectively, Savers offers entirely new merchandise every three weeks.
• Scale married to local tailoring. With hundreds of stores, the company can apply data through its 6-million-member loyalty program to optimize assortment, flow, and seasonality at the local level. It can backstock off-season goods, drip them out at the right time, and flex floor space to match neighborhood demand.
• Multi-monetization. Unsold inventory isn’t a liability. The company exports, recycles, or wholesales it to create an incremental revenue stream, while also keeping landfill diversion part of its brand story.
• Brand halo. Because Savers funds local nonprofits, the firm operates with a built-in community goodwill advantage compared to traditional clothing retailers. Every drop-off becomes a story about supporting charity and sustainability – soft power that purely commercial resale apps don’t have.
• Capital efficiency. New stores are highly accretive. Each new store generates 15% to 20% profit margins, on a stand-alone basis.

Taken together, these elements create a moat that few competitors can cross. Traditional retailers can bolt on “resale corners,” but they can’t replicate Savers’ 70-year infrastructure of donations, partners, and processing know-how.

Given Savers’ business model, there’s plenty of room for the company’s growth to accelerate. In its most recent quarter, for example, U.S. same-store sales soared 6%, which is double or triple the growth rate of most clothing retailers.

Looking ahead, the company should benefit from several factors.

1. Because Savers operates fewer than 400 stores in North America, it has massive expansion potential across the U.S. and Canada. Many mall landlords court them as anchor tenants.
2. The thrift supply chain is tariff-free, which means Savers does not need to waste precious resources absorbing tariff expenses or trying to rejigger its supply chain.
3. Savers finds itself in the right place at the right time. Gen Z has embraced thrifting because it is affordable, unique, and sustainable. Capital One Shopping reports that 83% of zoomers have purchased or are interested in purchasing secondhand.

Not surprisingly, the secondhand clothing market is growing five times faster than the overall apparel industry. According to ThredUp, the U.S. secondhand market grew 14% in 2024, compared to just 3% for the broader apparel market. Online resale was even stronger – up 23%. Analysts expect the U.S. resale market to nearly double by 2029, reaching roughly $40 billion.

That’s not a niche. That’s an empire in the making.

Savers is on track to earn about $0.50 per share this year and $0.65 per share in 2027. That steady growth rate would give the stock a valuation of 25 times 2026 earnings and 20 times the 2027 result.

Although this valuation is not the “deep discount” variety you might find on the racks of a Savers store, it is below the sector average. Further, if the company accelerates its expansion plans and/or boosts its profit margins as much as I anticipate, earnings could surprise on the upside.

Top 2026 Stock No. 4: Primo Brands

Water is the ultimate circular economy product – although Mother Nature does most of the heavy lifting. Her complex process of evaporation, precipitation, and decades-long subterranean filtration cycles water through planet Earth to sustain both flora and fauna.

The bottled water industry is a small drop in that planetary bucket, but it too operates within Mother Nature’s hydration cycle. This trait gives it a circular economy identity. Its core product is essentially limitless. And it can source and distribute that product without relying on a foreign supply chain. In other words, the bottled water industry can thrive as a purely domestic business.

Enter Primo Brands Corp. (PRMB), one of the largest branded water companies in North America.

In a market obsessed with AI-everything, Primo Brands seems defiantly analog. It manages springs, bottles water, delivers water, restocks coolers, and operates a vast logistics network. The company delivers drinking water through three primary sales channels.

First, it sells branded bottled water at retail. This division, which accounts for about 60% of total company sales, includes national powerhouses like Poland Spring and Pure Life, regional spring-water labels like Arrowhead, Deer Park, and Ice Mountain, as well as premium brands like Saratoga and The Mountain Valley. The company distributes these brands into more than 200,000 retail outlets across the United States and Canada. That footprint gives Primo negotiating leverage on shelf space, feature frequency, cold placement, and in-store displays.

Second, Primo operates a large direct-delivery network that supplies five-gallon water bottles directly to homes and businesses. This segment, which accounts for about 35% of company sales, resembles a subscription utility. Customers place recurring orders, Primo loads routes from local branches, and trucks deliver water on a scheduled cadence. That recurring model produces predictable revenue and strong lifetime customer value when service runs smoothly.

Third, Primo runs exchange and refill businesses, which account for about 5% of total sales. Consumers can exchange empty multi-use bottles at approximately 26,500 retail locations or refill bottles at over 23,500 self-service stations. That reusable packaging system reduces plastic waste while creating recurring, traffic-driving transactions.

Behind these customer-facing activities sits a vertically integrated network of more than 80 springs, bottling plants, distribution centers, warehouses, and delivery fleets. Primo employs over 12,000 associates and manages logistics coast-to-coast. This is not a marketing shell over outsourced production. It is an industrial hydration platform.

Primo Is Both an AI Survivor and Applier

Importantly, Primo is one of those rare enterprises that operates a relatively future-proof business. That quality puts it squarely into the AI Survivors framework. Artificial intelligence cannot replace hydration. It cannot digitize a spring. It cannot virtualize a truck route. The demand for clean water persists, regardless of technological shifts.

At the same time, Primo also fits in the AI Appliers category. The company already invests in warehouse management systems, forecasting tools, and digital customer interfaces. AI-driven route optimization can reduce miles driven. Predictive analytics can cut inventory imbalances. Call-center automation can shorten resolution time and increase retention. Revenue management systems can optimize price-pack architecture and SKU mix.

AI will not eliminate Primo’s network. It will increase its return on invested capital.

This water company does not promise moonshot growth. It offers something rarer – a recovering industrial consumer platform trading at a distressed multiple while generating nearly $800 million in annual free cash flow. That combination can reward patient capital far more reliably than the next AI wannabe.

Top 2026 Stock No. 5: Carter’s

There is one type of consumer who does not respond to financial uncertainty the way economics textbooks say they should. These consumers do not defer their purchases. They do not trade down to a cheaper brand. They do not wait for a sale or consult a spreadsheet to reconsider their priorities. They do not care about the price of gasoline or the direction of interest rates.

They simply buy the onesie because the baby needs the onesie.

Those consumers — the parents of a child between zero and ten — represent the core customer base of Carter’s Inc. (CRI), North America’s dominant baby and children’s apparel company. The company possesses a 25% market share in its category and operates over 1,000 stores across the U.S., Canada, and Mexico.

Despite these strengths, however, investors have spent most of the past three years punishing the stock for a “sin” that was beyond its control: a tariff regime that crushed its profit margins. The stock collapsed from above $75 to a 52-week low of $23 before recovering to around $40 today.

But a recovery is clearly underway, as recent results indicate. In the first quarter of this year, revenue rose 8.1% to $681 million, exceeding analyst expectations by $20 million. Earnings per share of $0.39, while down from $0.43 the prior year, came in $0.29 ahead of what the Street had modeled.

The star of the quarter was the direct-to-consumer business. Total U.S. retail net sales grew nearly 13%, with comparable sales up more than 10% versus the same quarter of the prior year. It was the fourth consecutive quarter of positive comp growth, and the company is seeing improvement in its two-year comp trend as well.

The international business is adding to the picture. Total international net sales rose 14% over the prior year, driven by Canada and Mexico. The Mexico business posted a plus-21% comparable sales result in the first quarter, and the company plans to open 12 new stores there this year.

The only major negative in the quarter has become an odd sort of positive: tariff expense.

Because tariffs added more than $30 million to the company’s cost structure in the quarter, operating margins plummeted more than 50%. That’s the bad news. The good news is that the Supreme Court’s ruling against the IEEPA tariffs will provide major benefits to Carter’s.

First, management expects the combined effect of lower tariff rates and the elimination of the India-specific tariff to boost margins toward normalized levels. Second, Carter’s should soon receive a windfall from the tariff reversal earlier this year.

The company has filed for a refund of approximately $130 million in IEEPA tariffs paid between last year and early 2026. Although the company has not booked this “gain,” it expects to receive the funds later this year.

Since Carter’s net debt totals just $94 million, a $130 million tariff rebate would eliminate all its liabilities and leave $36 million leftover. The company has signaled that it will use this “excess” money to fund growth investments, including $20 million in new marketing efforts.

Despite the improving prospects for Carter’s, the stock is still languishing at low valuations. It is trading for just 11 times estimated earnings and pays a 2.6% dividend yield.That valuation does not seem overly demanding for North America’s dominant baby and children’s apparel company — with over 25% market share, more than 1,000 stores, and a maturing e-commerce platform.

As margins normalize into next year, and revenue growth continues to gain momentum, the stock could appreciate significantly over the next year or two.

Top 2026 Stock No. 6: Birkenstock

Even though Birkenstock Holding plc (BIRK) sandals are more popular than ever, the company’s stock has fallen out of fashion. Slightly disappointing earnings results in December 2025 knocked the stock for an 11% one-day loss – increasing its drop over the preceding 12 months to 25%.

But this steep price decline is creating a great opportunity to buy a premier global brand off the discount rack. You don’t often get the chance to buy a 250-year-old cult brand at a what’s-wrong-with-it valuation, especially right after it reports the best year in its history.

Birkenstock’s fiscal 2025 results not only set a record, but did so by a wide margin. What’s more, the company’s annual revenues and net profit are now more than double what they were four years ago. For the year, revenue reached approximately €2.1 billion, up 18% – with all regions contributing double-digit growth. The Americas grew roughly 18%, Europe, the Middle East, and Africa (EMEA) grew mid-teens, and Asia-Pacific (APAC) grew 34%. Those growth rates place Birkenstock near the top of the global footwear category.

Volume growth, rather than price increases, powered most of these strong results. Unit pairs sold grew approximately 12%, while average selling price (ASP) increased 5%, supported by targeted price actions and the mix shift toward premium executions. The company continues to produce double-digit growth on both unit and ASP lines, which is a rare achievement for any clothing company in the current environment.

Clearly, the company is not “broken.” It simply disappointed investors, mostly because of short-term factors like foreign exchange headwinds, tariff impacts, and capacity constraints. On last month’s earnings call, Birkenstock management reduced revenue growth guidance for 2026 to a range of 13% to 15%, versus the 17% number Wall Street had penciled in. Management also trimmed the gross margin forecast from 59% to 57% — a casualty of foreign exchange impacts and tariffs.

Importantly, short-term headwinds are causing most of this downward growth revision. The core, long-term engine of the business is still roaring ahead: strong top-line growth, a brand with real moat, and a long runway of organic growth in both product and distribution.

Management emphasized that demand is not the factor constraining its growth; it’s the company’s limited production capacity. As CEO Oliver Reichert put it, “Our growth is only limited by our production capacity and disciplined distribution.” In other words, product scarcity is mostly intentional, not accidental. Birkenstock is pacing supply deliberately to preserve premium positioning and full-price realization.

A Classic “AI Survivor”

In early 2025, I introduced the concept of “AI Survivors” — enterprises whose value proposition becomes stronger in an AI-saturated world. These are businesses that produce value by providing physical experiences, sensory appeal, scarcity, and/or identity. The more digital and automated the world becomes, the more humans look for grounding in the uniquely human or material aspects of life.

Birkenstock fits that profile perfectly.

It monetizes physical comfort and iconic fashion – something an AI model cannot simulate or replace. Birkenstock sells physical products that serve an essential human desire to “walk the way nature intended,” while promoting a feel-good fashion ethos. That brand equity should strengthen as “screen fatigue” accelerates.

Birkenstock’s journey from a fringe “hippie sandal” to a universally recognized fashion staple is one of the most unusual brand evolutions in modern consumer culture. For decades, Birkenstocks were the footwear of the “flower power” counterculture – embraced in the United States in the 1960s and ’70s by the hippie movement as a symbol of comfort, natural living, and rebellion against “the Establishment.”

If you strip the story to its essentials, you find a simple narrative: The worst of the bad news – tariffs, FX drag, and the guidance reset – is reflected in the share price. The business itself just delivered the strongest year in its history and continues to invest in future capacity, distribution, and premium mix expansion.

Demand is booming, while disciplined production growth prevents product saturation and discounted pricing. The consumer continues shifting toward structured, comfort-first closed-toe silhouettes, and Birkenstock is capturing a growing share of that market. The brand continues to extend into new, fast-growing geographies, especially APAC. The direct-to-consumer channel is robust and growing.

Lastly, the more digital our world becomes, the more we humans will crave non-digital products and experiences. Birkenstock answers that craving.

Top 2026 Stock No. 7: Devon Energy

Not all natural gas is created equal. Its location greatly affects its value.

For example, the Delaware Basin’s natural gas, much like a long-distance sweetheart, is geographically undesirable.

Today, natural gas prices in the Delaware Basin, in far west Texas and southeast New Mexico, are depressed for one obvious reason: Gas has nowhere to go. The pipelines that run from the upper Permian Basin to hubs near the Gulf of Mexico do not have enough “offtake capacity” to transport all the gas the region produces.

In the parlance of the oil & gas industry, this excess production is called “stranded gas,” and it is so worthless that producers must find ways to dispose of it. The producers who have permits to burn off the gas simply “flare” it at drilling sites. Otherwise, they must pay companies to truck it away, like dumpsters full of old mattresses.

But the economics of producing natural gas in the Delaware Basin may be on the verge of a major transformation – one that will flip today’s negative gas pricing into solidly positive pricing. 

A company called Devon Energy Corp. (DVN) is ideally positioned to benefit from that prospective transformation. It is the fourth-largest natural gas producer in the Delaware Basin, and it has been investing heavily in natural gas transport and processing facilities. 

One of those facilities is the 580-mile Matterhorn Express Pipeline, which opened for business in 2024. This new pipeline, in which Devon holds a 12.5% stake, transports up to 2.5 billion cubic feet per day of natural gas from the Waha Hub to the Katy area near Houston.

Following close on the heels of the Matterhorn, Devon’s new 365-mile Blackcomb Pipeline is in operation and aims to be in service in the second half of 2026. It will transport gas from West Texas to the Agua Dulce Hub in South Texas, near Corpus Christi.

Importantly, Devon has contracted for significant offtake capacity on both pipelines, which is why the company is planning to ramp up its natural gas production from the Delaware Basin over the next few years.

Devon might also benefit from a new “wildcard” source of natural gas demand: data centers.

As the big tech companies build ever-larger and ever-more-numerous data centers, they are struggling to secure the dedicated power supplies these centers require.

For example, Dominion Energy Inc. (D), the utility that serves Northern Virginia’s “data center alley,” announced in October 2024 that it “expects the time it takes to connect large data centers to the electric grid to increase by one to three years, amid a surge of requests, bringing the total wait time to as long as seven years.”

Because of power bottlenecks like these – both current and prospective – the big tech companies are turning to every and any possible power source to satisfy their needs. 

But over the near term, natural gas will take the lead in supplying the additional power. According to Goldman Sachs, natural gas will satisfy 60% of the power demand growth from AI and data centers, while renewables will provide the remaining 40%.

As a result of this growth, data centers could boost the demand for natural gas to fuel U.S. power plants by 20% to 45% over the next three years, according to Wells Fargo research. The midpoint of that estimate would be equivalent to doubling the current production from the Delaware Basin.

The natural gas market offers three major advantages over competing technologies…

1. It is abundant.
2. It is cheap, especially in the Delaware Basin.
3. It is a proven technology with relatively rapid permitting processes.

Data center demand for natural gas could become especially acute in the Delaware Basin, with a new “Data Center Alley” potentially blossoming in that region.

To be clear, data centers will not immediately impact the economics of natural gas production in the Delaware Basin. However, this wildcard source of demand, combined with the two new pipelines coming onstream, could produce significantly higher and sustainable natural gas pricing throughout West Texas.

This likelihood is not lost on the heavy hitters of the U.S. oil & gas industry. They have been falling all over each other to acquire drilling acreage in and around the Delaware Basin. Because this region, which extends from West Texas into southeastern New Mexico, is less developed than the eastern Permian, it contains vast, untapped reserves.

Devon Energy was ahead of the game. Way back in January 2021, Devon kicked off this land-grab in the Delaware Basin by launching a $5.75 billion takeover of WPX Energy. After completing the deal, Devon possessed a massive 400,000-acre land position in the Delaware, along with significant production. 

Five years later, Devon is attempting to cash in. The company is devoting about 60% of its capital investment budget to drilling projects in the Delaware. 

Devon Energy’s share price does not reflect any upside potential from these new activities… nor much upside potential from any of its other activities.

But as Delaware gas prices trend higher, in the context of stable-to-rising energy prices, Devon’s share price could soar from current levels. 

Moving Forward

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Eric Fry

Editor, Smart Money