Evelyn Chou, Climate Innovation Portfolio Manager at Neuberger Berman, joins Market Domination to provide insights on AI and its role in the industrial sector.
Chou noted that one “really interesting” detail about the success of industrial stocks and XLI (XLI) so far this year is that it has kept pace with the S&P 500 (^GSPC) for much of the year, despite mega-cap tech dominating the stock market narrative. She attributes this trend to industrial participation in AI and electrification.
“My favorite company is Nvent Electric (NVT). It's a mid-sized company that's not very well-regarded, but it's emerged as a leader in liquid cooling, which is something that Jensen [Huang] In fact, it was mentioned several times in Nvidia’s (NVDA) most recent earnings call. This is very important because AI data centers have three times the power density of traditional data centers,” Chow told Yahoo Finance.
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Video Transcript
As data center infrastructure gets stronger.
Thanks to the AI boom, industrial companies are well positioned to reap huge benefits.
We're looking at how to use the Yahoo Finance playbook to get a fuller picture.
Now we're joined by Evelyn Chow.
She is the Climate Innovation Portfolio Manager at Neuberger Berman.
And thank you for joining us here.
We've talked a lot today about AI trading, and there are a lot of different components to it, and one big one is power.
Um, so tell me about the industrial side of things.
One of the things I like most about industry is that investing in industry is investing in innovation.
And a lot of that is climate innovation, because when you think about companies developing renewable technologies, improving our aging power grid, working on water infrastructure, a lot of it is happening in the industrial sector.
And one of the ways this has really manifested itself throughout the year has been through AI electrification and beneficiary trading.
Hmm, I think there are a lot of ways to play that.
Um, but one of the really important things to keep in mind is how much electricity is going to be required to power these data centers.
This means cleaner power generation and greater energy efficiency.
Well, that's really important to achieving Evelyn.
What's interesting is that investors appear to be starting to realize this.
right.
However, while energy utility stocks have risen significantly, industrial stocks have risen less.
Obviously, it's a more diverse group, it's not just energy-related, but do you think investors are starting to understand this as well?
What is the connection to that paper?
I think so, I mean, one of the things that's really interesting about the industrial sector so far in XL I is that despite the absolute dominance of mega-cap tech in the stock market narrative, the industrial sector has kept pace with the S&P for the majority of the year, and a lot of that is coming from participation in AI and electrification.
So we're seeing a real divergence in the organic and revenue growth profiles of the companies benefiting from this theme.
Uh, you know, I think we're starting to see an increased awareness from data center equipment providers and thermal management.
Well, there are a few points I want to highlight, so I'll elaborate on that.
Well, one of the things that I really like is a company called Invent Electric ticker NVT.
Smith Cap is an under-appreciated company that has emerged as a leader in liquid cooling.
Now, liquid cooling is a technology that Jensen actually mentioned a few times during NVIDIA's last earnings call.
This is crucial because AI data centers have three times the power density of traditional data centers.
Liquid cooling reduces energy usage by 50%.
This has given Invent a large market share in this area.
The company is also improving its margin profile by continuing to consolidate in a highly fragmented industry, and in fact just yesterday announced an acquisition at a very reasonable multiple.
And then you have companies like Eaton, which is, you know, Invent is a new kind of new school technology.
Eaton has a lot going for it.
It's a fairly diverse industry.
So what are they doing regarding this new field?
Yes, Eden is like, um, Invents Big Brother.
So this is an electrical giant, and it does a lot in the data center space.
And it has a really important expressiveness and usefulness, which, as you pointed out, is going to be really important to Julie because it takes that much power to power a data center.
Well, what I like about Eaton is that they are pioneers in this field.
They have a great management team and a very strong track record of execution.
Well, I think they're capable of mid-teens earnings growth in the near future, which is very relevant to my belief that it's worth paying a little bit of a premium for quality at a time when there's a lot of macro adverse currents at play right now. Another name that interests me is Xylem, which is an integrated water solutions provider.
So it's not necessarily electricity, but that's another important factor here.
Yeah, so Xylem is also very important.
So our water infrastructure is completely outdated.
So if you think our power grid infrastructure is outdated, you should look at water.
Well, we get a failing grade every year from the American Engineering Society.
Um Xylem is a prime candidate to take advantage of this.
Last year I bought a pure plate, a pure Evoqua.
Yes, and we are now in a position to offer an integrated service on both the institutional and commercial fronts.
We've also brought in a CFO who is very highly regarded for his ability to integrate deals and pursue further consolidation, so I think this is a very fragmented space where I can continue to do a lot of work.
There are also important issues surrounding PF remediation, which is a top environmental issue.
