The AI-led stock rally that rewarded mega-cap technology stocks has finally started to trickle down to other industry players that were seemingly not related to the AI and tech industry. Consider this: The information technology sector gained about 11% over the past three months, while the S&P 500 utilities sector jumped 18% in the same period. Why? Because investors are scrambling to pile into utilities since they are set to benefit from the dramatic rise in power demand thanks to the data center boom caused by the mass AI adaption. As Nvidia’s CEO Jensen Huang put it in the company’s latest earnings call, the “next industrial revolution” has started with the dawn of AI and across the globe data centers are being “converted into AI factories.”
AI-Led Stock Market Boom: “No Longer Dependent on Just One Stock”
A Wall Street Journal report recently quoted Nadia Lovell, senior U.S. equity strategist, global wealth management at UBS, who said that the market is “no longer dependent on just one stock” when it comes to AI as she sees a “broadening out of the AI trade.”
Insider Monkey’s research backs this notion. Our research recently unlocked several AI stocks that are better than mega-cap AI stocks with soaring valuations. If you are looking for an AI stock that is as promising as Microsoft but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
For this article we first conducted thorough research to see which lesser-known companies are offering products and services set to see demand in the AI revolution. These companies included firms making hardware, software, infrastructure and backend products necessary for mass AI deployment and consumption. From these companies we chose 7 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).
7. AXT Inc. (NASDAQ:AXTI)
Number of Hedge Fund Investors: 19
California-based AXT makes semiconductor substrates, the base material used in wireless device fabrication. This makes AXT Inc. (NASDAQ:AXTI) a strong AI play since there is and will be a continued rise in semiconductor demand amid the AI boom. The stock is already up about 40% so far this year.
Earlier in May AXT Inc. (NASDAQ:AXTI) posted Q1 results. Adjusted EPS in the quarter came in at -$0.03, surpassing estimates by $0.05. Revenue in the quarter jumped 17% year over year to $22.7 million, beating estimates by $0.95 million.
6. Recursion Pharmaceuticals Inc (NASDAQ:RXRX)
Number of Hedge Fund Investors: 21
AI-based drug discovery is one of the biggest trends major companies and venture capitalists are betting on. Some estimates suggest AI-led drug discovery could soon be a $100 billion business. Recursion Pharmaceuticals Inc (NASDAQ:RXRX) is an AI drug discovery play, as Recursion Pharmaceuticals Inc (NASDAQ:RXRX) uses high-dimensional data and predictive results for drug discovery and development. Last year, Nvidia decided to invest $50 million in Recursion Pharmaceuticals Inc (NASDAQ:RXRX) in a partnership that would see the combination of Recursion Pharmaceuticals Inc’s (NASDAQ:RXRX) chemical and biological datasets with NVIDIA DGX™ Cloud and other AI tech stack for drug discovery.
As of the end of the first quarter of 2024, 21 hedge funds tracked by Insider Monkey reported owning stakes in Recursion Pharmaceuticals Inc (NASDAQ:RXRX). The biggest stakeholder of Recursion Pharmaceuticals Inc (NASDAQ:RXRX) during this period was Catherine D. Wood’s ARK Investment Management which had a $245 million stake in Recursion Pharmaceuticals Inc (NASDAQ:RXRX).
5. Littelfuse Inc. (NASDAQ:LFUS)
Number of Hedge Fund Investors: 36
Littelfuse Inc. (NASDAQ:LFUS) makes circuit-protection devices, switches and automotive sensors. Earlier this month, Baird upgraded the stock to Outperform and set a $300 price target, up from $270. Baird is bullish on the stock amid strengths in transportation and electronics segments.
Littelfuse Inc. (NASDAQ:LFUS) is poised to benefit from autonomous driving, data center and semiconductor boom thanks to the AI wave. During its Q1 earnings call, the company talked about semiconductors, AI and growing demand:
“We are seeing new product launches gain traction as customer design activities accelerate. In the quarter, we secured a meaningful medical win with our custom power semiconductors for a customer in China. We also won business for multiple appliance customers in China for both fuses and switches. We delivered a semiconductor win for a space-related communications application. We also won business for data server power supplies for a customer in Taiwan. Finally, we delivered a meaningful telecom win in India that will utilize our core circuit protection offering. Beyond near-term trends, structural electronics end market drivers such as artificial intelligence, automation and technology reliability remain key opportunities as our customers continue to depend on us for innovative engineering expertise.”
Read the full earnings call transcript here
Like other under-the-radar AI stocks, Littelfuse Inc. (NASDAQ:LFUS) also got the attention of hedge funds in the first quarter, as 36 funds reported owning stakes in Littelfuse Inc. (NASDAQ:LFUS) as of the end of March, significantly more than 22 funds in the previous quarter.
4. Deere & Co (NYSE:DE)
Number of Hedge Fund Investors: 48
Agricultural machinery and equipment company Deere & Co (NYSE:DE) may be a surprising entry in the list of AI stocks to buy in 2024, but many analysts believe Deere & Co’s (NYSE:DE) investments in AI would bear fruit in the months and years to come. For example, Deere & Co (NYSE:DE) is using AI to develop autonomous tractors that can recognize weed from plants and differentiate between plants based on quality.
Deere & Co’s (NYSE:DE) See & Spray can scan 2,200 square feet per second using machine learning and vision analysis to optimize spray usage. Earlier this month Deere & Co (NYSE:DE) posted Q1 results. Adjusted EPS in the quarter came in at $8.53, beating estimates by $0.61. Revenue declined 12.4% year over year to $15.24 billion, beating estimates by $1.92 billion. Over the past one year the stock has gained about 7%, and its PE ratio is 11.29, which shows it’s an undervalued play in the agricultural industry.
3. Amphenol Corporation (NYSE:APH)
Number of Hedge Fund Investors: 51
Connecticut-based Amphenol Corporation (NYSE:APH) makes electronic components, fiber optic connectors, cable and interconnect systems. It’s one of the best under-the-radar AI stocks to buy according to experts since Amphenol Corporation (NYSE:APH) would see a boost in demand for its products as more and more companies deploy data centers and AI infrastructure. The stock has gained about 40% so far this year.
Last month, BofA updated its US 1 List, which contains buy-rated US stocks the firm is recommending. Amphenol Corporation (NYSE:APH) is part of the list. Evercore also added the stock to its Tactical Outperform list ahead of the companies’ quarterly results. Amphenol Corporation (NYSE:APH), which also pays a $0.22 per share quarterly dividend, smashed analyst estimates for its Q1 results, reporting a 95 revenue growth in the period to $3.26 billion.
Of the 919 hedge funds tracked by Insider Monkey, 51 hedge funds tracked by Insider Monkey reported owning stakes in Amphenol Corporation (NYSE:APH), up from 41 hedge funds in the previous quarter.
2. TD Synnex Corp (NYSE:SNX)
Number of Hedge Fund Investors: 53
TD Synnex Corp (NYSE:SNX) is a an IT infrastructure solutions company. The stock is one of the best AI plays since it helps businesses actually deploy and use AI solutions. In August last year, TD Synnex Corp (NYSE:SNX) launched “Destination AI,” an aggregation of many AI software and services solutions by TD Synnex Corp (NYSE:SNX). TD Synnex Corp (NYSE:SNX) has over 40 AI vendors for their catalog of pre-validated, ready-to-deploy solutions.
In April, UBS upgraded the stock to Buy and increased its price target to $145 from $115. Based on this price target the stock has an upside potential of about 11% from its current levels.
Of the 919 hedge funds tracked by Insider Monkey, 53 hedge funds reported owning stakes in TD Synnex Corp (NYSE:SNX), significantly up from 28 hedge funds in the previous quarter. This shows a massive rise in hedge fund sentiment as smart money investors are clearly flocking to the stock thanks to its AI-related catalysts.
Ave Maria Value Fund made the following comment about TD SYNNEX Corporation (NYSE:SNX) in its Q3 2023 investor letter:
“A new position was established in TD SYNNEX Corporation (NYSE:SNX), a distributor of information technology (IT) products. Although IT spending has stable secular growth, it is going through a soft patch which allowed us to acquire shares at an attractive price. The distribution of IT products is a low margin, but highly free cash flow generative business that requires significant scale to compete. TD Synnex is the largest distributor with the most scale benefits and has a business model that produces excess free cash flow during softer IT spending periods due to lower inventory investments. This allows TD to return cash to shareholders through buybacks.”
1. Quanta Services Inc (NYSE:PWR)
Number of Hedge Fund Investors: 56
Quanta Services Inc (NYSE:PWR) supplies skilled labor to power companies, on behalf of clients. It’s one of the best under-the-radar AI stocks to buy in 2024 since its services will be in demand as companies’ appetite for AI talent grows. Quanta Services Inc (NYSE:PWR) also provides infrastructure services for electric power, pipeline, industrial and communications industries.
Quanta Services Inc (NYSE:PWR) CEO Duke Austin talked about AI, data centers and much more during its latest earnings call:
“We’ve spent tons of R&D here. We’d like to conductor. We certainly have installed plenty of the other high-density conductor and we like it. So I think in general, yes, it makes sense. Technology will be a piece of this.
It will — and I — when you look at mining machines and you look at everything we see from a power demand, AI is a piece of it. But the onshoring, the shifts, the Amazon centers that are fully electric, you can imagine all the things that are drawing load right now. And it’s in my mind, we talked about data centers, I don’t know, four years ago, and said it would be a big push. We had no idea that AI would come in as well. And I just think as you move forward, if you haven’t used auto power or ChatGPT that ain’t going anywhere. That’s fantastic. I love it. It’s great. I think the country is in that direction and it’s certainly demand there and the jets and everything else we do on any given day, even if you reduce power. It’s kind of like appliances.”
Read the entire earnings call transcript here.
A Wall Street Journal report recently mentioned that Joseph Ghio, an analyst at Williams Jones Wealth Management, who is highly bullish on stocks that are indirect beneficiaries of AI, owns a stake in Quanta Services Inc (NYSE:PWR).
Artisan Mid Cap Fund stated the following regarding Quanta Services, Inc. (NYSE:PWR) in its fourth quarter 2023 investor letter:
“Along with DexCom, notable adds in the quarter included Quanta Services, Inc. (NYSE:PWR) and Jabil. Quanta provides outsourced skilled labor for maintenance and construction services, primarily to utilities. We have followed the company for over a decade and have witnessed its shift from oil and gas to renewables. The energy transition (solar and wind farms, electric vehicles, etc.) requires investments in the US energy grid to support greater electrification. At the same time, climate change is increasing stress on the existing grid, forcing utilities to increase maintenance spending. Furthermore, Federal incentive programs, such as the Inflation Reduction Act and Bipartisan Infrastructure Act, will help fuel Quanta’s long-term growth given its expertise in transmission and distribution connections as renewable energy infrastructure seeks to connect to the grid. The stock sold off early in the quarter on concerns that higher interest rates would lead to a pullback in renewables investments by utility customers. However, based on our industry research, we think Quanta’s key customers are well resourced and committed to meeting long-term electrification needs via infrastructure investment. We used the selloff as an opportunity to move the position into the CropSM at a more attractive valuation.”
If you are looking for an AI stock that is as promising as Microsoft but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
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