In this article, we discuss the 20 industrial stocks already riding the AI wave.
When investors think of artificial intelligence (AI), they usually relate the thought to prominent hardware and software companies working in the technology sector. However, a much wider understanding of AI is needed in order to pick out the best stocks that are likely to ride the AI wave as it evolves over time. Contrary to public opinion, one of the smartest ways of jumping on the AI bandwagon is by playing the industrial sector. Since the start of 2023, the beginning of the AI boom in other words, industrial stocks have jumped close to 30% in value. Of these, the firms that are directly exposed to AI verticals have more than doubled in value. According to a Goldman Sachs study on the matter, in the fourth quarter of 2023, over 30% of industrial firms mentioned AI in their earnings reports, up from just 10% in the same period the preceding year.
In addition to the obvious picks in the semiconductor space, investors should turn their attention towards industrial firms that provide construction, engineering, electronics, cooling, and connectivity services. Even though these firms derive only a portion of their revenue from AI at the present, the explosive growth potential of AI can be a meaningful driver of their revenues in the coming months. Indeed, some indications of this can be gleaned from the fact that industrial firms linked to AI grew their revenues by almost 15% last year. This number is comfortably above their non-AI peers and the S&P 500 average for 2023. Industrial firms help manage the computational powers of AI data centers, make high speed connections possible, and also make sure they operate at optimal temperatures.
Lazar Naiker, an analyst at capital markets firm AGF Investments, explains how traditional data centers are different from AI ones. Essentially, AI data centers are powered by graphic processing units (GPUs), while their traditional counterparts are powered by central processing units (CPUs). GPUs operate at a faster speed and thus need higher bandwidth cables for communication with other GPUs. There is a 10 to 1 difference in the number of cables needed to power GPUs and CPUs. AI applications require constant communication between data center GPUs as well, the development of neural networks, so to speak, whereas this is not the case for CPUs. Another key difference is power consumption. Per Naiker, the GPU uses almost 5 times the power required by a CPU.
Our Methodology
For this article, we selected industrial stocks that posted more than 25% gains in 2024. From this list, we selected firms that have links to the AI universe and approximated percentage revenues based on these links. These stocks are also popular among hedge funds. 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).
Industrial Stocks Already Riding the AI Wave
20. Crane Company (NYSE:CR)
Number of Hedge Fund Holders: 35
YTD Return as of August 1: 37%
Approximate Percentage Revenue from AI: 2%
Crane Company (NYSE:CR) manufactures and sells engineered industrial products. The firm is a market leader in providing electronics and power conversion solutions to the aerospace and defense markets. These markets are making use of AI to transform their businesses. The company also markets fiberglass-reinforced plastic panels. These panels are being used in AI data centers as they reduce the overall weight and streamline the design for such use cases. The flurry of business activity as a result of the AI boom has helped the company beat market expectations on earnings per share and revenue for the second quarter of 2024 by $0.08 and $21 million respectively.
Max Mitchell, the CEO of Crane Company (NYSE:CR), remarked during the second quarter earnings call that strength in electronics and process flow technologies had helped the company post a 9% core sales growth in the quarter, stressing that the firm had a direct line of sight to delivering on 18% earnings growth.
19. EMCOR Group, Inc. (NYSE:EME)
Number of Hedge Fund Holders: 41
YTD Return as of August 1: 76%
Approximate Percentage Revenue from AI: 4%
EMCOR Group, Inc. (NYSE:EME) provides construction and facilities, building, and industrial services. Although the company has benefited from the AI data center boom this year, it already had a solid growth trajectory due to deep links with the hyperscale data center customers, domestic semiconductor firms, and clean energy component manufacturers. In the first quarter of this year, the domestic electrical and mechanical construction segment of the firm generated combined sales of over $2 billion, up 27% from a year ago. These contributed to total revenue of $3.4 billion and earnings per share were $4.17, surpassing estimates by a whopping 47%.
Tony Guzzi, the CEO of EMCOR Group, Inc. (NYSE:EME), said during the first quarter earnings call that the company was executing well with strong demand across many of the market sectors, including high-tech and traditional manufacturing, as well as network and communications, which included data center work.
In its Q1 2024 investor letter, TimesSquare Capital Management, an asset management firm, highlighted a few stocks and EMCOR Group, Inc. (NYSE:EME) was one of them. Here is what the fund said:
“Many of our Industrial positions provide necessary business-to-business operational services, highly technical components, automation & efficiency improvements, or essential infrastructure services. EMCOR Group, Inc. (NYSE:EME) supplies electrical, mechanical, and facilities services. The company’s strong results fueled a 62% increase in the stock price. Highlights from the quarter included improved margins and a record level of backlog. We trimmed the position on this strength.”
18. SPX Technologies, Inc. (NYSE:SPXC)
Number of Hedge Fund Holders: 19
YTD Return as of August 1: 48%
Approximate Percentage Revenue from AI: 5%
SPX Technologies, Inc. (NYSE:SPXC) supplies infrastructure equipment serving the heating, ventilation, cooling, detection and measurement markets worldwide. The cooling products and engineered air movement solutions for the HVAC industrial and power generation marketed by the firm are directly linked to the construction and powering of AI data centers across the United States. The market-leading position of the firm in the cooling market enabled it to beat market expectations on earnings per share and revenue by $0.17 and over $10 million respectively in the second quarter of 2024.
Gene Lowe, the CEO of SPX Technologies, Inc. (NYSE:SPXC), commented during the second quarter earnings call that the firm was exceeding expectations on key profit measures amid robust demand for cooling products. He noted in particular the performance of OlympusV, a cooling product that balances power usage with water cooling.
In its Q3 2023 investor letter, Artisan Partners, an asset management firm, highlighted a few stocks and SPX Technologies, Inc. (NYSE:SPXC) was one of them. Here is what the fund said:
“SPX Technologies, Inc. (NYSE:SPXC) is a specialty manufacturer of commercial and industrial HVAC equipment as well as specialty detection instruments. Over the years, the company has successfully transformed into a simpler and cohesive company by divesting lower margin, cyclical businesses and acquiring higher growth, higher margin businesses. The company is now able to capitalize on several secular tailwinds, including a global regulatory push to improve energy efficiency, the reshoring of manufacturing and a large pipeline of US infrastructure upgrades. In addition, we believe the company’s multiple, highly cash-generative business units should fuel a continued bolt-on acquisition strategy. The company reported financial results that beat expectations, and management increased guidance, citing benefits from ~50% of its business that is exposed to secular tailwinds. Given the thesis-affirming results, we added to the position.”
17. Garmin Ltd. (NYSE:GRMN)
Number of Hedge Fund Holders: 24
YTD Return as of August 1: 35%
Approximate Percentage Revenue from AI: 7%
Garmin Ltd. (NYSE:GRMN) designs, develops, manufactures, markets, and distributes a range of wireless devices worldwide. These devices gather a lot of data that can be used to track fitness, activities, workouts, and wellness. This data is then used by the software offered by the firm to suggest further workouts and activities based on AI models. The company is also partnering with generative AI algorithm innovator NeuroBrave to develop advanced solutions to treat and improve mental wellness, neural disorders, chronic stress, anxiety, and different types of addictions.
Clifton Pemble, the CEO of Garmin Ltd. (NYSE:GRMN), said during the second quarter earnings call that his company viewed AI as a potential tool. He said that his company was interested in customer data and trend tools powered by AI in a more constrained model. He added that his company was taking a wait-and-see approach towards AI.
In its Q4 2023 investor letter, Diamond Hill Capital, an asset management firm, highlighted a few stocks and Garmin Ltd. (NYSE:GRMN) was one of them. Here is what the fund said:
“Other bottom contributors included our short positions in Garmin Ltd. (NYSE:GRMN) and International Business Machines (IBM), as well as our long position in Chevron. Outdoor fitness and adventure equipment maker Garmin benefited from strong growth in its fitness and auto original equipment manufacturer segments. Over the long term, we believe the company’s high-end wearables products will face significant competition from competitors like Apple and Samsung.”
16. MasTec, Inc. (NYSE:MTZ)
Number of Hedge Fund Holders: 42
YTD Return as of August 1: 48%
Approximate Percentage Revenue from AI: 8%
MasTec, Inc. (NYSE:MTZ) is an infrastructure construction company that provides engineering, building, installation, maintenance, and upgrade services for communications, energy, utility, and other infrastructure. The company is one of the largest construction firms in the US and has the geographic reach, scalability, and financial stability to be one of the biggest beneficiaries of the data center boom in the AI space. The firm also provides design, construction, and maintenance services for wireless networks. As more AI products penetrate households, high speed connectivity is going to be a key for realizing the true potential of these products. A lot of investment is thus geared towards improving wireless connection speeds across the US, with MasTec being one of the primary beneficiaries.
Jose Mas, the CEO of MasTec, Inc. (NYSE:MTZ), underlined during the second quarter earnings call that the communications and pipeline segment of the firm continued to deliver solid margins despite pressures in the power delivery segment. He said the diversification efforts of the firm in the energy domain were serving to offset power delivery worries. He noted that despite short term pressures, the long-term power market predictions bode well for the future of his firm.
In its Q1 2024 investor letter, First Pacific Advisors, an asset management firm, highlighted a few stocks and MasTec, Inc. (NYSE:MTZ) was one of them. Here is what the fund said:
“MasTec, Inc. (NYSE:MTZ) is a contractor that builds and repairs infrastructure for telecoms, electric utilities, oil and gas pipelines and the clean energy industry. The company benefits from strong spending for 5G in telecom and government support (including the Infrastructure Investment and Jobs Act) for clean energy and the electrical grid.10 The Mas brothers have an impressive history of rolling up smaller players and growing earnings, most recently in the electrical and clean energy spaces. But we became uncomfortable with the low margins and competition in the electrical utility and clean energy businesses. On Aug 4, 2023, in its Q2 2023 earnings release, the company reduced guidance, and we began to exit our position, partially in Q3 2023 and fully by the end of Q4 2023.”
15. Entegris, Inc. (NASDAQ:ENTG)
Number of Hedge Fund Holders: 42
YTD Return as of August 1: 27%
Approximate Percentage Revenue from AI: 9%
Entegris, Inc. (NASDAQ:ENTG) develops, manufactures, and supplies microcontamination control products, specialty chemicals, and advanced materials handling solutions. The firm markets specially mixed liquids and gasses that are used in semiconductor manufacturing facilities. These chips are then used by AI hardware and software firms. The company was recently awarded a $75 million grant under the CHIPS Act by US President Biden to fund the development of a facility in Colorado that would support the production of liquid filter membranes and Front Opening Unified Pods (FOUPS). The latter are specialized containers invented by Entegris to secure semiconductor wafers when transported during the manufacturing process. Top chip companies like Intel, TSMC, Micron, and GlobalFoundries are FOUP customers.
Bertrand Loy, the CEO of Entegris, Inc. (NASDAQ:ENTG), said during the second quarter earnings call that the company was the first materials supplier to be awarded funding through the CHIPS Act, validating the importance of the position of the firm in the chip market. He also noted that AI-driven growth was propelling markets forward in chips and memory.
In its Q4 2023 investor letter, The London Company, an asset management firm, highlighted a few stocks and Entegris, Inc. (NASDAQ:ENTG) was one of them. Here is what the fund said:
“Entegris, Inc. (NASDAQ:ENTG) – ENTG shares rallied during the quarter as visibility in the semiconductor market improved and demand for its value added product suite remains strong. ENTG is benefiting from the higher amount of materials needed for miniaturization and is winning business as its products deliver faster time to yield. Management has been delivering on its debt reduction strategy. We remain attracted to the industry’s high barriers to entry, limited competitors, and high switching costs.”
14. Intuitive Surgical, Inc. (NASDAQ:ISRG)
Number of Hedge Fund Holders: 79
YTD Return as of August 1: 34%
Approximate Percentage Revenue from AI: 12%
Intuitive Surgical, Inc. (NASDAQ:ISRG) develops, manufactures, and markets products that enable physicians and healthcare providers to enhance the quality of and access to minimally invasive care. In addition to the use of AI in robotics, the firm is also exploring the use of AI to develop a machine learning tool that will make use of real-time artificial intelligence to help predict risks related to surgical complications. The fifth generation of the da Vinci robot, the premier robotic surgery tools marketed by the firm, incorporates AI into the platform that will enable the overall package to evolve over time with software updates. It has 10,000x compute power compared to the previous iteration.
Gary Guthart, the CEO of Intuitive Surgical, Inc. (NASDAQ:ISRG), told investors last year that the firm was finally in a position to leverage years of work with research partners on AI by marketing technologies that make use of AI to help shorten surgeon training times, help hospitals improve surgical program efficiencies and ultimately reduce costs. One of these products, called Case Insights, was launched by the firm in late 2023.
In its Q1 2024 investor letter, Baron Funds, an asset management firm, highlighted a few stocks and Intuitive Surgical, Inc. (NASDAQ:ISRG) was one of them. Here is what the fund said:
“Intuitive Surgical, Inc. (NASDAQ:ISRG) sells the da Vinci surgical robotic system for minimally invasive surgical procedures. The stock rose after the company announced the planned launch of the da Vinci 5, its next-generation, multiport robotic system. The new system has 10,000 times the computing power of its predecessor and features over 150 design upgrades such as force feedback, improved visualization, and productivity enhancements. Intuitive plans to launch the device at a small number of customers in the U.S. before releasing it more broadly. We think the da Vinci 5 will enable Intuitive to continue to generate strong revenue and earnings growth and maintain its competitive edge.”
13. Eaton Corporation plc (NYSE:ETN)
Number of Hedge Fund Holders: 85
YTD Return as of August 1: 27%
Approximate Percentage Revenue from AI: 14%
Eaton Corporation plc (NYSE:ETN) operates as a power management company worldwide. The primary AI catalyst for the firm is sales of data center equipment. It makes and sells electrical components used in data centers across the globe. AI trends sweeping the market are already helping the firm increase order. The backlog for the electrical segment of the business has jumped to more than $11 billion, quadrupling from pre-COVID levels. The company also continues to impress investors with organic sales growth, margin expansion, and very strong free-cash-flow generation.
Craig Arnold, the CEO of Eaton Corporation plc (NYSE:ETN), said during the second quarter earnings call that the company expected that the major part of the growth in the AI data center was still ahead, noting that only 5 to 10% of the capital spending of large businesses was directed towards AI data centers in the present market. Arnold clarified, however, that the backlog of data center build, in excess of $140 billion, represented eight years of business that his company was well-positioned to take advantage of in the coming months and years.
In its Q1 2024 investor letter, Ave Maria, an asset management firm, highlighted a few stocks and Eaton Corporation plc (NYSE:ETN) was one of them. Here is what the fund said:
“Eaton Corporation plc (NYSE:ETN) is an intelligent power management company. The company is a long-term beneficiary in the trend towards electrification, energy transition and digitalization. Eaton is also benefiting from unprecedented global stimuli such as the Inflation Reduction Act, Infrastructure Investment and Jobs Act, the Chips and Science Act and the EU recovery plan known as the NextGenerationEU.”
12. Fluor Corporation (NYSE:FLR)
Number of Hedge Fund Holders: 28
YTD Return as of August 1: 27%
Approximate Percentage Revenue from AI: 17%
Fluor Corporation (NYSE:FLR) provides construction and engineering services. The company provides mission critical services to several departments in the government. Recently, it announced that it would be incorporating AI into all construction and engineering services. The firm hopes to deduce how engineering, procurement, fabrication and construction will perform over the next few months, and then measure in real time how they do through the use of AI tools. A senior executive of the firm said that the ability to read and interpret big data in real time would be crucial in making better decisions at every step in the construction and engineering businesses.
David Constable, the CEO of Fluor Corporation (NYSE:FLR), highlighted during the first quarter earnings call that his company was well positioned to benefit from the increase in data center construction as a result of the AI boom. He also noted that the CHIPS Act was jump starting semi production in the US, noting that this too would help the firm land business in the government and private sector in 2024 as well as 2025.
11. Corning Incorporated (NYSE:GLW)
Number of Hedge Fund Holders: 31
YTD Return as of August 1: 31%
Approximate Percentage Revenue from AI: 18%
Corning Incorporated (NYSE:GLW) engages in the display technologies, optical communications, environmental technologies, specialty materials, and life sciences businesses. The optic products offered by the firm have witnessed a surge in demand in the past few months as large companies invest in AI data centers. In addition to these connectivity products, the firm also provides the glass that is on top of popular smartphone brands. These smartphones are becoming AI powerhouses in themselves. The company grew the optical business by over 40% in the second quarter, compared to the same period last year, due to AI demand, even as the smartphone market remained soft.
Wendell Weeks, the CEO of Corning Incorporated (NYSE:GLW), detailed during the second quarter earnings call that the growth in revenue, sales, and earnings during the first half of 2024 was primarily driven by strong adoption of optical connectivity products due to soaring demand for generative AI. Weeks noted that new AI data centers needed about 10 times the fiber optic connections utilized by normal data centers, largely due to compute power of new GPUs and the need to connect the GPUs together. He said his firm had helped customers design the links needed for this kind of interconnectivity over the past few years.
In its Q2 2024 investor letter, O’keefe Stevens Advisory, an asset management firm, highlighted a few stocks and Corning Incorporated (NYSE:GLW) was one of them. Here is what the fund said:
“Corning Incorporated (NYSE:GLW), another long-time holding, announced Q2 results would come in better than anticipated due to outperformance in their optical connectivity products used for Generative AI. Corning has long been a disappointing investment; with leading-edge technology, it consistently underperforms expectations. Their “springboard” plan, which revolves around $3 billion of excess capacity, seems to be the first sign in a long time that they are ready for a surge in growth. Management has frequently discussed the potential for operating leverage in nearly every conference call, anticipating a return to normal business conditions. Margins should expand over the coming quarters, driving EPS growth. The $3B in incremental sales could be worth in excess of $900m in EBITDA.”
