The artificial intelligence investment frenzy has sent chip maker Nvidia Corp. higher by about 140 per cent so far this year. Electrical power utilities arose as an AI peripheral play resulting from the expected rapid expansion in AI-supporting data centers. The normally stodgy S&P 500 utilities index climbed 17.5 per cent between the end of February and May 21 this year despite bond yields climbing for the bulk of the period.
BofA Securities analyst Andrew Obin believes he’s found another promising play on AI, one that also benefits from decarbonization and the U.S. population migration to southern states like South Carolina, Florida and Texas: refrigeration and air conditioning. BofA expects that the AI infrastructure market, which includes electrical power and heating and cooling, will show a 16 per cent compound annual growth rate to at least 2026.
The cooling needs for data centers are extraordinary. In a June research report, Mr. Obin wrote “The next generation of AI chips run so hot that traditional air cooling is insufficient … An incremental one megawatt of electricity for IT loads would require about 285 tons of cooling, or similar to the requirements of a 115,000 square foot commercial building.”
Mr. Obin’s top picks to benefit from the AI theme are Vertiv Holdings LLC (VRT-N) and Eaton Corp. (ETN-N). Vertiv is almost a pure play on data centers, generating 75 per cent of its sales from related products and services. In late 2023, Vertiv acquired CoolTera Ltd., a provider of liquid cooling solutions for new generation semiconductors. The company also partnered with Nvidia to enter the U.S. Department of energy’s COOLERCHIPS research program. Eaton Corp. is a more diversified company, generating only 14 per cent of revenue from data centers.
In a perfect world I could report that few investors have discovered Vertiv and Eaton as beneficiaries of the AI investment theme, but that is not the case. Vertiv is up 230.7 per cent in the past 12 months and Eaton is up 58.7 per cent. Still, Eaton is trading at a still-maybe-reasonable 30.3 times earnings and Vertiv is in similar territory at 34.8, which could prove reasonable if growth continues.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
Invesco chief global market strategist: This big rotation into value and small caps is only just beginning
Market leadership this month has shifted out of large-cap companies and into small-cap stocks in Canada and especially in the U.S. The Russell 2000, a U.S. small-cap index, has posted a double-digit gain in the past week alone. Rate cuts expectations by central banks have provided underlying support for small-cap stocks to rally. Add to that, the elevated valuations of some large-cap stocks and healthy gains in the sector, which has some investors cashing in their profits and buying value stocks. But is this new leadership sustainable? The Globe and Mail’s Jennifer Dowty speaks with Invesco’s chief global market strategist Kristina Hooper to get the answer to that question (and many others).
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From political fog, world growth doubts creep back in
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Contra Guys: Watch for these buying signals in beaten-down office REITs
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Others (for subscribers)
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Wednesday’s analyst upgrades and downgrades for July 17, 2024
Tuesday’s analyst upgrades and downgrades for July 16, 2024
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What’s up in the days ahead
Good news, it’s a stock picker’s market! Never mind that active investors make this claim nearly every year. It’s actually kind of true right now. Tim Shufelt will report.
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Compiled by Globe Investor Staff