Wall Street is hyping AI. This fund manager is betting instead on fires, HVAC and Berkshire Hathaway.

By Barbara Kollmeyer

Seek companies that can use AI tech to their advantage, says Milwaukee-based manager

A fund manager explains why MSA and Watsco are key holdings.

When it comes to artificial intelligence, individual investors should be wary of Wall Street's current hard sell, according to Troy McGlone of Heartland Advisors.

"Even if you identify the winner, if you're at the wrong part of the market and you overpay for it, it can still be a terrible investment," McGlone, co-portfolio manager for the investment adviser's $150 million Opportunistic Value Equity Strategy and $500 million Mid Cap Value Fund HRMDX, told MarketWatch in a Monday interview.

Wall Street's big banks, brokerages and investment firms have been pushing investors to buy obvious AI winners, the Milwaukee-based manager said. "The reality is that's a very picked-over area, and there are a lot of people selling stuff right now as it relates to the capital cycle.

"The capital is being raised by the same Wall Street firms that are publishing these forecasts that go out into the future that inevitably will be wrong," said McGlone. "You should not read someone's research and say, 'Oh, because they're excited about the cycle that means this is going to continue,' because the reality is that's their incentive."

Owning Cisco (CSCO) at the top of the dot-com cycle meant a 20-year wait to break even on that investment, he said. And while Nvidia (NVDA) is beloved by much of Wall Street, 70% of the chip giant's accounts receivable are linked to five customers - some of which are developing their own chips, he said.

"In the long run, it's highly improbable that the current situation will remain intact the way it is structured in the market right now, where companies have almost unlimited pricing power because there's a scramble for capacity."

The manager urged focusing instead on companies that can use AI technology, as costs will likely come down over time, leading to benefits for companies implementing the technology.

One pick is MSA Safety (MSA) - the No. 1 player in the fire-service industry with a gas-detection business that's largely being ignored. Shares are up 6% over a year.

"They have built their own software and have all their own sensors, and so, from that perspective, they have an engineering team that's a cost structure. The one thing we know about artificial intelligence is that it brings down the cost structure of developing code," he said.

"We believe it will be a business that actually is a net beneficiary from the technology over time because they have such dominant market-share position in their key markets."

Another pick is Miami-based Watsco (WSO), the biggest U.S. distributor of heating, ventilation and air-conditioning equipment, giving it a dominant footprint in the southeastern states.

"Most of the revenue comes from repair and replace, so the air conditioner goes out and you have an emergency call to get that replaced," he said. The company competes in a "very fragmented space," is more than double the size of its next biggest competitor and has been using AI to optimize pricing.

"On the one side it's a consolidated original-equipment-manufacturer industry, [and] on the other side there's tens of thousands of contractors that do not have pricing power. So [Watsco is] in the middle with a fully digitalized platform, but right now the market's focused on the fact we're in the midst of a tough housing cycle, so the stock's off materially," McGlone said. The stock is 26% lower on a year-over-year basis.

His last mention is a long-term holding and No. 3 in the Opportunistic Value strategy: Berkshire Hathaway (BRK.B). For one, he likes its "collection of high-quality assets trading at an attractive valuation.

"Because management deploys capital into both public equities and owning entire businesses, analyst earnings estimates understate how cheap the company is."

While most of its wholly owned businesses are largely insulated from AI disruption, such as railroad Burlington Northern Santa Fe and Berkshire Hathaway Energy (BHE), others, such as Precision Cast Parts, are seeing an AI boost due to a dominant share in the forged-casting industry.

"There are only a few companies globally capable of producing engine parts for the 'hot section' of a gas turbine used to create electricity."

BHE is also well-placed to respond to rising power-generation demands, McGlone said. "New [Berkshire] CEO Greg Abel was previously CEO of BHE, so we have a high degree of confidence in his ability to identify attractive opportunities in this ecosystem," said McGlone.

The markets

U.S. stock futures (YM00) (ES00) (NQ00) are pointing higher, the day after the Nasdaq COMP hit a fresh record. Treasury yields BX:TMUBMUSD10Y are easing, and oil (CL.1) (BRN00) is down more than 2%.

 
Key asset performance                                                 Last       5d      1m      YTD     1y 
S&P 500                                                               7,773.95   1.17%   0.72%   13.56%  15.34% 
Nasdaq Composite                                                      27,477.31  2.45%   3.66%   18.22%  19.77% 
10-year Treasury                                                      5.269      2.00    47.50   109.70  113.80 
Gold                                                                  4,183.5    -0.75%  -4.92%  -3.43%  4.38% 
Oil                                                                   87.63      -1.47%  -7.02%  52.64%  41.25% 
Data: MarketWatch. Treasury yields change expressed in basis points. 

The buzz

Alphabet's Google (GOOGL) (GOOG) reached a multiyear deal for nuclear energy from Constellation Energy (CEG), whose stock is jumping.

Option Care Health's stock (OPCH) is soaring 33% after a report that McKesson (MCK) and a private-equity firm are nearing a $5 billion deal to buy the medical-infusions-services provider.

Latest data on the U.S. trade balance are due at 8:30 a.m. Federal Reserve officials, including the New York Fed president, John Williams, are due to speak at various conferences.

Elon Musk's wealth tops $1 trillion. These entire countries produce less.

The chart

Inflation is the reason Treasury yields have risen so much, according to investors polled in Deutsche Bank Research Institute's third-quarter survey. However, strategists led by Jim Reid noted their long-running question about inflation expectations showed a rise of just a 10th of a percentage point in expected inflation over the next five years. So how can that be? Reid's explanation was that investors may view inflation risk as a near-term shock that will eventually fade or be dealt with by the Fed. Reid's own view on rising Treasury yields is that it's mostly because of strong growth.

Top tickers

These were the most searched ticker symbols on MarketWatch as of 6 a.m.

 
Ticker symbol  Security name 
NVDA           Nvidia 
SPCX           SpaceX 
NVDA           Tesla 
GME            GameStop 
MU             Micron 
TSM            Taiwan Semiconductor Manufacturing 
AMD            Advanced Micro Devices 
META           Meta 
MSFT           Microsoft 
AAPL           Apple 

-Barbara Kollmeyer

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10-06-26 0844ET