We start this edition of Market Factors with peripheral AI-related stocks growing quickly and that might offer a better risk versus reward profile than the widely known names. CIBC technical analysts added more colour and more names to the increasingly promising natural gas investment trend. The diversion covers a pet theory of mine and as always we look ahead to the important data releases for the coming week.
The production area at Celestica's company headquarters in Toronto is seen on May 27, 2013.JENNIFER ROBERTS/The Globe and Mail
Tech world
Four lesser-known AI-related stock ideas
RBC Capital Markets went to the trouble of publishing a 241-page report on the state of generative AI, so the least we can do is use it to find investment opportunities with the best risk-reward combination.
The bulk of the risk lies with the hyperscalers – Meta Platforms, Amazon.com, Microsoft, Alphabet and Alibaba for example – because they are spending hundreds of billions of dollars annually on AI infrastructure with only vague notions as to how to monetize this investment. The recipients of the capital expenditure don’t have this monetization risk.
Nvidia Corp. (NVDA-Q), the poster child of the trend as the dominant provider of GPUs (graphic processor units) that form the basis of AI-related data centers, is also a risky proposition for investors. The combination of high valuations (Nvidia is trading at 48 times trailing earnings) and high expectations could continue for a while, but historically it ends quickly and painfully for investors.
I like data center infrastructure names. The RBC team estimates that data centers, typically using 100 megawatts of power annually, cost US$7-12 million per megawatt to build excluding the processing power. The providers of this equipment represent a picks and shovels investment strategy.
The infrastructure in a data center includes cable management, switchgears, cooling equipment, backup generators, fire and security, power distribution and connectivity.
Toronto-based Celestica Inc. (CLS-T) is among the biggest beneficiaries of AI-related spending. The company’s data center-focused hardware platform solutions division – encompassing data storage, computing logistics and networking – saw a 99 per cent year-over-year revenue increase and now constitutes 40 per cent of total sales. RBC analysts wrote that hyperscaler customers have provided strong outlooks into 2026. This suggests confidence in profit growth for Celestica into next year.
Flex Ltd. (FLEX-Q) is growing data center-related revenue at a 50 per cent year over year pace, helped by strategic acquisitions in power and cooling sectors. The company provides an array of power solutions and also technology to rack and cool processors. The company is developing a strong business footprint in Europe by expanding Polish operations.
Eaton Corp. (ETN-N) provides cooling solutions and uninterruptible power supply equipment. Management tout their position as “by far the biggest player in the U.S.” and not dependent on global supply chains, an important distinction when import tariffs are threatened. Eaton’s competitive position is enhanced by a close partnership with Nvidia.
Network security specialists Crowdstrike Holdings Inc. (CRWD-Q) is “positioned to win GenAI cyber-security spending dollars,” according to RBC analysts, thanks to its Charlotte AI product. Charlotte AI is a generative AI-powered assistant that autonomously identifies and prioritizes security breaches in corporate networks. This is a company that is leveraging AI capacity rather than benefitting from AI infrastructure spending.
LNG Canada in KitimatSupplied
Commodities
Natgas stock picking
I outlined CIBC analyst Jamie Kubik’s bull case for natural gas and his top picks in the sector on Monday. On Tuesday, likely in response to the growing acceptance of natgas as a hot sector, a new report from CIBC added a technical layer to stock picking among gas-producing stocks.
To recap quickly, the bull case for domestic natural gas is driven by the opening of the LNG Canada facility in Kitimat, B.C., allowing exports to non-U.S. nations. Gas power is also necessary to cope with data centre-related electricity demand.
Mr. Kubik’s top picks based on fundamental analysis are Kelt Exploration Ltd. (KEL-T) and NuVista Energy Ltd. (NVA-T), which are both increasing production. Tuesday’s report added Advantage oil and Gas Ltd. (AAV-T) and Birchcliff Energy Ltd. (BIR-T) as producers most leveraged to potentially higher commodity prices.
In the same report Tuesday, the technical analytics team at CIBC added further colour to select stock performance, adding two more names - Tamarack Valley Energy Ltd. (TVE-T) and Tourmaline Oil Corp. (TOU-T) - as promising opportunities.
Based on numerous technical measures including relative strength index (RSI), momentum and beta, the technicians estimate a price target of between $17.00 and $17.90 for Nuvista Energy (currently trading in the $14.90 range).
The technicians believe that Tamarack Valley Energy has already broken out of its previous range and have a new technical target of $6.20 (currently $4.80). Kelt Exploration, trading around $7.50 at time of writing, “looks poised for a technical breakout from a three-year consolidation pattern that measures toward $9.20-$11.25 levels” according to the team.
Finally, the technical analysis team identified a new buy signal for Tourmaline Oil Corp. (currently $65.75) that could drive it above $74.00.
Diversions
The Atlantic essay The Real Reason Men Should Read Fiction is worthwhile on its own merit but I picked it for the diversion because it leads to one of my pet theories.
The column’s author Jeremy Gordon argues that quality fiction breeds empathy and understanding. By extension, the often-quoted-but-weakly sourced statistic that men account for only 20 per cent of the North American fiction market infers a general decline in male empathy that in turn explains horrors that include Andrew Tate and Donald Trump.
My pet theory is similar. I believe that the lack of fiction reading and the terrible male behaviour evident on social media arise from the fact that many men don’t know what a villain looks like. If they read fiction they would, and might realize when they’re acting like jackasses.
The essentials
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What’s up next
GDP for April is the big (and pretty much only) economic data point domestically and it’s out on Friday. Economists forecast a flat month-over-month reading, which translates into 1.3 per cent year over year growth.
There is also a single major corporate release in the coming week: Alimentation Couche-tard is expected to announce earnings of US$0.474 after market close on Wednesday the 25th.
Things are much busier south of the border. An initial look at annualized GDP for the second quarter will be released on Thursday and a drop of 0.2 per cent is expected. A preliminary look at durable goods orders for May is also out Thursday. A headline number of 8.5 per cent month over month is forecast but only a flat month-over-month result ex-transportation.
Personal spending for May will be announced on Friday and economists expect a 0.1 per cent month-over-month rise. The important ISM manufacturing survey will be announced on July 1 with a 48.7 result forecast.
See the full earnings and economic calendar here