Industrial moves for the AI boom: Top picks

Neuberger Berman Climate Innovation Portfolio Manager Evelyn Chow joins Market Domination to give insight into AI and its role in the industrial space.

Chow notes that one of the "really interesting" details about the success of industrials and the XLI (XLI) year to date is that they kept pace with the S&P 500 (^GSPC) for most of the year, despite the dominance of megacap tech in the equity market narrative. She notes that this trend stems from industrial participation in AI and electrification.

"So one of the ones I really like best is a company called Nvent Electric (NVT). It's a somewhat underappreciated mid-cap company that's emerged as the leader in liquid cooling. Now, liquid cooling is a technology that Jensen [Huang] actually referenced several times in the last Nvidia (NVDA) earnings call. And it's really critical because AI data centers have three times the power density of a traditional data center," Chow tells Yahoo Finance.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video transcript

As infrastructure for data centers ramps up.

Thanks to the A I boom, industrial companies are in a prime position to see big gains.

We're looking at how to navigate the big picture with the Yahoo finance playbook.

Joining us now is Evelyn Chow.

She is a climate innovation portfolio manager at New Burger Berman.

And thank you for joining us here.

Today, we talk a lot about the A I trade and there are a lot of different components and a big one is power.

Um So tell us about the industrial side of this.

I think one of the things that I love about industrials, the most is that to invest in industrials is to invest in innovation.

And a lot of that is climate innovation because when you think about what companies are creating renewable technologies, improving our aging grid, addressing water infrastructure, a lot of that is happening in the industrial space.

And so one of the ways that we've really seen this express itself over the course of the year has been in this A I electrification, beneficiary trade.

Um You know, I think there's a lot of different ways to play that.

Um But one of the things that's really important to bear in mind is just how much power is going to be required to power these data centers.

So you want to have clean generation and an improvement in energy efficiency.

Um And that's really important to achieve Evelyn.

It's interesting because it seems as though investors are starting to catch on to this.

Right.

But we've seen this big lift in utility companies that are going to be providing that energy, the lifted industrials has been less now.

Of course, it's a more diverse group, it's not just energy related, but do you think investors are, are starting to catch on to this as well?

That their connection to that thesis?

I think so, I mean, one of the really interesting things about industrial in the XL I year to date is that it actually was keeping pace with the S and P for most of the year, despite the absolute dominance of mega cap tech in the equity market narrative, a lot of that has stemmed from the participation in A I and electrification.

So you see a real bifurcation in these organic growth and earnings growth profiles for companies that are benefiting from the theme.

Um You know, I think you've started to see some recognition and data center equipment providers, thermal management.

Um There are a few that I'd love to highlight um and we can go into that.

Uh So one of the ones I really like best is a company called Invent Electric ticker NVT.

It's a somewhat underappreciated Smith cap company that's emerged as the leader in liquid cooling.

Now, liquid cooling is a technology that Jensen actually referenced several times on the last NVIDIA earnings call.

And it's really critical because A I data centers have three times the power density of a traditional data center.

Liquid cooling reduces your energy usage by 50%.

And so, Invent is taking tons of market share in this space.

It's also improving its margin profile continuing to consolidate a very fragmented industry and it actually just announced an acquisition yesterday at a very reasonable multiple.

And then you have a company like Eaton which has been around for, I mean, this is, you know, Invent is is a new kind of a newer school technology.

Eaton does a lot.

It it's pretty, pretty diverse um industrial.

So what are they doing with this with regard to this new area?

Yes, Eden is uh kind of like Invents Big Brother.

So it's uh electrical juggernaut, it does a lot of stuff within the data center space.

It also has very significant representation and utility which as you noted, Julie is going to be really important because you need to have all that power in order to power the data center.

Um You know, the thing I like about Eaton is it's an early mover in this space.

It's got a great management team, a very strong track record of execution.

Um And I think they're going to be able to grow, you know, mid teens earnings growth over the foreseeable future, which, you know, it ties in very much to my belief that right now it is worth paying a bit of a premium for quality when you have so many macro cross currents at play one more uh name that I'm interested in Xylem and this is uh integrated water solutions provider.

And so uh not necessarily electricity but another essential component here.

Uh Yeah, I mean, Xylem is very critical as well.

I mean, our water infrastructure is absolutely ancient.

So if you thought our electric grid infrastructure was old, you should take a look at water.

Uh It gets a failing grade from the American Society of Engineers every single year.

Um Xylem is in pole position to capitalize on this.

It uh last year bought its pure plate, pure evoqua.

Uh And now it's in a position, it can provide an integrated offering in both the institutional and commercial verticals.

It also brought in a CFO who is very well regarded for his ability to integrate deals and to pursue further ma and so I think this is a really fragmented space where I could continue to do a lot of work.

There is also a kicker as it relates to PF remediation, which has been top of mind among environmental concerns.