By: Philip MacKellar
Published: Oct 26, 2025
In early October we sold our final tranche of TransAlta Corp. The stock was purchased twice in 2016, and our average price was $6.30. In December, 2024, we started to unload the position, and the final sale took place in this month at $21.09. This translated into a gain of 234.8 per cent, plus dividends along the way.
The experience with TransAlta highlights the benefits of our contrarian strategy. In 2016, we took a stake because the stock was cheap, the balance sheet was decent, and the industry was out of favour. Many analysts were concerned by persistent operational issues, force majeure events at TransAlta, and were forecasting prolonged electricity demand weakness across many of the company’s markets, including Alberta. Despite the problems, we thought the shares looked too cheap, especially as the then-CEO had a clear turnaround plan.
Once it was in our portfolio, the second element of our strategy was simply being patient. It can take years for economic and corporate conditions to change, and that proved to be the case with TransAlta. Instead of waiting, some investors trade frequently, which accumulates trading costs and taxes, and risks the possibility of missing out on future rallies. We prefer to avoid these costs and risks and sit on our hands instead.
Finally, when it comes time to sell, our strategy is to unload the holding in slices to capture the benefits of momentum and industry excitement. After surging late last year, which gave us the opportunity to unload some shares at $16.99 and $20.73, the ticker fell back in the spring and reached its year-to-date low in early April when the market was in free fall after U.S. President Donald Trump’s “Liberation Day” tariffs. Since then, the stock has powered higher.
The latest earnings were mixed. Revenue in the second quarter declined to $433-million from $582-million a year earlier, and net profit collapsed to a loss of $56-million from a gain of $112-million. Still, TransAlta beat analyst expectations and hit management’s targets for fleet availability, EBITDA, and free cash flow. The C-suite’s outlook for the remainder of 2025 is intact, but this guidance represents a decline from last year’s performance.
Despite the mixed quarter, the shares are rallying, along with utility stocks more generally. Investors are betting that the industry will excel thanks to increasing electricity demand driven by data centres, AI energy needs, and forecast reindustrialization under Mr. Trump’s trade agenda. Alberta is looking to cash in on the data centre and AI boom with a $100-billion investment plan over five years. Meanwhile, TransAlta is working with parties to add more power to the grid, and will likely discuss its data centre game plan at its Nov. 18 Investor Day.
The extent of investor excitement is easy to see in stocks such as TransAlta and others including Capital Power, Hydro One, Fortis, and Emera. It is not confined to Canada either – utility-focused ETFs including the iShares Global Utilities ETF, Vanguard Utilities Index Fund ETF, and many others are all having banner years.
The AI revolution, data centre expansion, and reindustrialization moves explain why the sector is surging. These trends may propel the industry higher still, but the DeepSeek event in January – in which the AI upstart introduced a product that cost a fraction of its rivals’ to develop – highlights how quickly utility stocks can reverse course when there is a bump in the AI road. Moreover, there is a strong argument that the market is already pricing in a rosy outcome where massive new AI data centres span the continent.
If that future does not transpire, if it is delayed even by a few years, or if AI models use decreasing electricity over time, it could spell trouble for utility stocks. Additionally, the AI sector must find a pathway to profitability. AI usage and competence are expanding quickly, but as many technological revolutions before it have demonstrated, new industries often have to endure a crisis and rewrite their business models before achieving profitability.
As for TransAlta specifically, the company looks expensive on nearly every valuation metric. Moreover, on certain measures, such as enterprise-value-to-EBITDA and price-to-sales, the company has never traded at these levels. It could grow into these valuations, but growth, and even consistent net income, have been elusive for TransAlta. Though that could change, we are happy to take the cash, part ways with this long-time position, and take some risk off the table.
Philip MacKellar is the General Manager at Contra the Heard Investment Newsletter.