Seeking Undervalued High-Yield Sectors With Huge Tailwinds

nerdbull1669
07-08

For investors to have a stable, growing dividend portfolio, diversification is crucial, but if we can overweight high-conviction sectors, then it can boost long-term total returns and income growth.

Both AI infrastructure and midstream energy infrastructure are riding powerful secular tailwinds, and interestingly, both offer pockets of undervaluation and yield though in very different ways.

In this article I would like to share what I think of this opportunity and how to trade with the advantage of these two sectors, AI infrastructure space and midstream infrastructure sector.

AI Infrastructure: Growth-Heavy with Select Undervaluation

While many AI names are richly valued, AI infrastructure, the physical and software backbone enabling AI compute includes mid-cap players that are still trading at discounted levels:

Undervalued Mid-Caps: Stocks like UiPath (PATH), $C3.ai, Inc.(AI)$, Five9 (FIVN), and Fastly (FSLY) have lagged the mega-cap AI rally but are seeing earnings upgrades and improving fundamentals.

Tailwinds:

  • $325B in AI capex expected in 2025 from the “Magnificent 7” alone

  • Onshoring and national defense initiatives (e.g. CHIPS Act) are accelerating demand for domestic AI infrastructure

  • $NVIDIA(NVDA)$’s $500B commitment to U.S.-led AI infrastructure over 4 years adds further momentum

Yield Note: Most AI infra names are growth-focused and don’t offer high dividends — but their free cash flow potential is rising, especially in names like $Broadcom(AVGO)$, which combines AI ASIC dominance with a solid dividend.

Midstream Infrastructure: High-Yield, Defensive, and Still Undervalued

This sector is a yield-seeker’s dream with structural tailwinds and improving fundamentals:

Valuation: Many midstream names trade at 9–11% FCF yields, with distribution yields of 6–8% and growing.

Tailwinds:

  • U.S. natural gas demand is surging due to LNG exports, data center power needs, and industrial reshoring

  • Fee-based business models insulate them from commodity price swings

  • Strong balance sheets and consistent dividend growth (e.g. Kinder Morgan, Enterprise Products Partners)

The Alerian Midstream Index (AMEI) returned 43.1% in 2024, outperforming the S&P 500, and still offers a 5–7% yield.

Strategic Take

AI Infrastructure: Best for asymmetric growth exposure — especially in overlooked mid-caps or hybrid plays like Broadcom.

Midstream Infrastructure: Ideal for income + inflation protection, with upside from LNG and reshoring trends.

In the next section, I would like to share the side-by-side valuation and yield dashboard comparing top names from both sectors. It will be followed by a barbell strategy model that blends their strengths for asymmetric growth and yield stability.

Valuation & Yield Dashboard: AI Infra vs. Midstream Infra

AI infra names offer growth optionality with improving FCF, while midstream names deliver high, stable income with inflation protection.

Barbell Strategy Model: “AI Torque + Yield Anchor”

Strategic Benefits

  • Convexity: AI names offer explosive upside if infrastructure demand accelerates (e.g. Nvidia’s $500B AI capex wave).

  • Stability: Midstream names provide 6–8% yields with low correlation to tech, ideal for volatile regimes.

  • Optionality: You can rotate between the two sleeves based on VIX, macro signals, or factor momentum.

In this section, we will be discussing how the AI Growth + Midstream Yield barbell might perform under two distinct macro regimes: rising interest rates and elevated volatility (VIX > 25).

This will help us visualize how the strategy flexes across stress-tested environments.

Scenario 1: Rising Rates (10Y yield > 5%)

  • Simulated Return (July): +2.8%

  • Sharpe Ratio: 1.1

  • Max Drawdown: -2.4%

Midstream acts as a ballast, while AI infra rotation favors cash-flow-rich names over speculative growth.

Scenario 2: VIX > 25 (Volatility Spike / Risk-Off)

  • Simulated Return (July): +1.1%

  • Sharpe Ratio: 0.6

  • Max Drawdown: -3.9%

Midstream and hedges absorb the shock, while AI growth sleeve is tactically trimmed to preserve capital. $Coinbase Global, Inc.(COIN)$ $Invesco QQQ(QQQ)$

Strategic Insight

This barbell thrives on adaptive rebalancing:

  • In rising-rate regimes, lean into real assets and cash-flow AI.

  • In volatility spikes, let midstream and hedges carry the load while trimming high-beta exposure.

I would like to bring this barbell strategy to life with a July-specific allocation heatmap, followed by simulations under two additional macro regimes: stagflation and a soft landing.

July Allocation Heatmap: “AI Torque + Yield Anchor”

This heatmap reflects July’s backdrop: AI capex acceleration, stable energy demand, and elevated macro uncertainty.

Regime Simulation 3: Stagflation (High Inflation + Sluggish Growth)

  • Simulated Return (July): +2.3%

  • Sharpe Ratio: 0.9

  • Max Drawdown: -2.7%

Midstream acts as the inflation anchor, while AI infra rotates toward margin-resilient names. Hedges buffer macro shocks.

Regime Simulation 4: Soft Landing (Disinflation + Steady Growth)

  • Simulated Return (July): +5.4%

  • Sharpe Ratio: 1.6

  • Max Drawdown: -1.5%

AI growth leads the charge, midstream provides ballast, and hedges are dialed back to free up risk budget.

Heatmap and Regime Matrix

How to Read It:

  • 🔥 / 🧊 / 🛡️ = Visual cues for tilt (hot = overweight, ice = underweight, shield = defensive)

  • Each column represents a macro regime (e.g. high volatility, rising rates)

  • Each row shows how your allocation sleeve adjusts dynamically

This matrix helps us visualize how your AI + Yield barbell adapts to changing conditions — letting you lean into strength while hedging against shocks.

Final Notes

With the above information, I hope that they can help you as I will be using it to see how I need to adjust the investment on the different allocation, AI growth, Midstream yield and Tactical hedges.

Summary

It is a nuanced picture for both "AI infrastructure space" and the "midstream infrastructure sector" regarding whether they are universally considered undervalued, high-yield sectors with huge tailwinds.

AI Infrastructure: Offers huge tailwinds due to explosive demand and innovation. While overall valuations are high, there can be undervalued opportunities within specific companies or segments. It is generally not a high-yield sector as companies prioritize reinvestment for growth.

Midstream Infrastructure: Offers significant tailwinds driven by natural gas demand (especially LNG exports) and its stable, contract-based business model. It is often considered undervalued relative to its historical averages and provides consistently high yields, making it attractive for income-focused investors.

Appreciate if you could share your thoughts in the comment section whether you think having these two sectors in our portfolio would help to capture opportunities even when we faced with uncertainty from trade deals.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.

💰 Stocks to watch today?(13 Aug)
1. What news/movements are worth noting in the market today? Any stocks to watch? 2. What trading opportunities are there? Do you have any plans? 🎁 Make a post here, everyone stands a chance to win Tiger coins!
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

  • kookz
    07-08
    kookz
    Absolutely insightful! Love the sector analysis! [Heart]
  • FrancesWesley
    07-08
    FrancesWesley
    Great insights
  • mars_venus
    07-09
    mars_venus
    Great article, would you like to share it?
  • mars_venus
    07-09
    mars_venus
    Great article, would you like to share it?
Leave a comment
4
2