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Is Eaton Corp Plc (NYSE:ETN) An Overvalued AI Data Center Stock?

We recently published a list Analyst Recommends 10 Best Stocks to Diversify Your Portfolio Away from Mega-Cap Tech and AI StocksSince Eaton Corp Plc (NYSE:ETN) ranks 5th on the list, it deserves a deeper look.

Venu Krishna, Head of U.S. Equity Strategy & Global Equity Linked Strategies at Barclays, recently shared a basket of stocks he recommends offsetting the risks that come from market concentration in big tech stocks. In an interview with CNBC, Krishna emphasized that he remains inclined towards big tech stocks, but the important question he addressed is which stocks offer more value outside of the tech sector in the long term.

Krishna’s methodology to find some of the best stocks outside of the tech sector is simple: find out at what “core fundamental” metrics big tech stocks are “excelling” at and then “try to come close to that and create a portfolio which can give us that kind of exposure.” Through this methodology, Krishna says, he came up with a well-diversified portfolio of stocks that could act as a “hedge” against market concertation in big tech.

Krishna said he applied “liquidity filters” on the whole market to remove a “bunch of companies” and narrow down to stocks with strong growth and FCF multiples.


Despite him pointing out the concentration of gains problem, Venu Krishna believes the rise of big tech stocks is a “healthy trend” and some of the gains are now bifurcating to other sectors, too.

However Krishna said that over the past 18 months his portfolio of stocks has lagged behind the Big Tech, but outperformed equal-weighted S&P 500 and market cap-weighted S&P 500.

For this article, we took a look at Krishna’s latest basket of stocks to offset concentration in big tech risks and picked 10 stocks with the highest number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Photo by Wes Hicks on Unsplash

Eaton Corporation PLC (NYSE:ETN)

Number of Hedge Fund Investors: 85

Barclays’ analyst Venu Krishna added Eaton in his list of stocks to offset the tech concentration risk.

As more and more companies deploy data centers to power their AI software, the demand for sustainable power solutions is rising, helping company like Eaton Corp Plc (NYSE:ETN). Bank of America recently said in a note that data centers, manufacturing and AI would cause demand growth from an “already-tight electrical grid.” BofA analysts believe solar and wind energy cannot meet this growing appetite and investors are currently incorporating energy sources that might not be there in the future. To profit from this growing energy demand, BofA recommended some stocks, and Eaton Corp Plc (NYSE:ETN) was one of them. During the first quarter, Eaton’s backlog jumped 20% year over year, driven by Aerospace and Electrical segments.

However, Eaton’s valuations has sparked concerns among analysts recently. The stock’s forward P/E is 34.25, much higher than the industry average of 20.1. The stock has gained about 67% over the past one year. The stock is trading at 30X FY24 consensus EPS estimate of $10.50 and 28x FY25 EPS estimate of $11.70. This is much higher than the stock’s 5-year average forward P/E of 22.32x. While Wall Street expects Eaton Corp Plc (NYSE:ETN) earnings to grow 10% next year, the stock price growth could remain capped given the already strong bull run the company saw.

Carillon Eagle Growth & Income Fund stated the following regarding Eaton Corporation plc (NYSE:ETN) in its first quarter 2024 investor letter:

Eaton Corporation plc (NYSE:ETN) traded higher after announcing better than expected quarterly results as well as providing guidance that was ahead of expectations for the fiscal year. The electraical power equipment company also announced a proactive multi-year restructuring program, enabling Eaton to continue growing while also reducing costs.”

Overall, Eaton Corp Plc (NYSE:ETN) ranks 5th on Insider Monkey’s list titled Analyst Recommends 10 Best Stocks to Diversify Your Portfolio Away from Mega-Cap Tech and AI Stocks. While we acknowledge the potential of Eaton Corp Plc (NYSE:ETN), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than Eaton Corp Plc (NYSE:ETN) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.

Disclosure: None. This article is originally published at Insider Monkey.