Capital Group sees 3 investing ideas rising above the rest

• Capital Group suggests looking beyond tech giants and instead focusing on companies supplying essential tools for the AI boom. Eaton Corporation, for one, with its strong position in power management and infrastructure, is poised to benefit from the surge in data centers and infrastructure projects.

• Netflix is set to thrive as the streaming wars continue, according to the investment firm. Its password-sharing crackdown and new revenue sources make the streamer a strong contender for long-term growth.

• Smaller, nimble brands like Hoka and On Running are challenging sportswear industry giants Nike and Adidas, and gaining market share ahead of some major sporting events. Legacy brands are fighting back with innovation and marketing, but it remains to be seen whether they’ll regain their footing.

There were plenty of bright spots to be found in the latest batch of quarterly updates. But Capital Group, one of the world’s oldest and biggest investing houses, noticed three portfolio ideas that seemed to outshine the rest. So if you’re on the prowl for some new winners and want to shake things up beyond the usual S&P 500 ETF, I’ve got the top picks they’re buzzing about.

1. The AI picks and shovels.

There’s a lot more to this boom than just tech stocks. AI is kicking off a new industrial revolution – and sparking a massive surge (pardon the pun) in power demand. Tons of “pick and shovel” companies are along for this ride – providing the very tools the revolution needs as it grows. That includes copper miners, data center providers, and energy firms.

One standout for Capital Group is Eaton Corporation, a US-based power management company operating in the electrical, hydraulic, aerospace, and auto industries, to name a few.

Where Eaton expects market growth to be this year (represented by arrows) and the sales growth, in percentages, that the company saw in 2023. Source: Eaton.

Capital Group sees Eaton boosted by the expansion of data centers, roads, water, and energy systems. It’s no coincidence, then, that the firm recently raised its 2024 profitexpectations, citing stronger-than-expected growth for data centers from huge cloud providers like Amazon and Google. And it’s no accident that Eaton’s electrical sector backlog reached $11.3 billion early this year, up from $2.8 billion in late 2019.

In their latest quarterly call with shareholders, Eaton noted that only 16% of the $1.2 trillion North American projects announced since 2021 are currently under construction, which implies that a ton of growth is expected in the coming years. What’s more, this figure includes only projects costing over $1 billion.

Other winners could include Caterpillar, which reported that its data center product salesoutpaced those for its bread-and-butter construction industries in the latest quarter.

2. A new phase in streaming.

Capital Group’s analysts have been binge-watching Netflix’s stock, certain that the streaming wars are far from over and that consolidation will be the next major plot twist as companies aim to scale up. They see leading streamers becoming bigger players in video games and sports. But, in the long run, they say the winners will be those with the cash to gobble up competitors.

Share of adults who said they’d used selected video streaming services at least once in the past month in the United States in 2022. Source: Statista.Netflix’s new crackdown on password sharing led to a peppy step up in subscribers and revenuein the latest quarter, showcasing its strong position against tech and media giants who might try to muscle in. Still, Netflix’s stocktook a hit when it announced it would stop reporting subscriber growth in 2025. Those counts were a hit stat in Netflix’s early days, but the streamer now argues that revenue and free cash flow are more meaningful indicators.Capital Group’s analysts like this change. They say investors fixate too much on subscriber counts and should focus on pricing strategies, international expansion, and Netflix’s ads platform. The shift is a signal of how Netflix is maturing, along with its work to diversify its revenue streams with advertising and an “extra member” tier enabled by the password-sharing crackdown. Those new revenue sources make subscriber numbers less important and put the spotlight on good old-fashioned financial growth metrics.

3. Fresh, up-and-coming sportswear.

Sportswear brands should be able to handle a bit of competition, right? It’s their whole ethos. And Capital Group sees this industry as ripe for a shake-up. Nimble specialist brands like Hoka (owned by Decker Outdoors), On Running, and heritage names like New Balance are steadily nibbling away at the market share of giants like Nike and Adidas. And the recent run of quarterly reports highlights the stakes: several top-seeded firms have lowered their forecasts as they rebuild and look for growth.In the meantime, Hoka and On Running are gaining traction, especially in the UK and Europe. And they’re poised to benefit even more from the upcoming “summer of sports” – major events like the UEFA EURO 2024 championships, the Olympic Games, and the Summer Paralympics.And this trend – with smaller brands nipping at the heels of industry giants – isn’t confined to sportswear. In cosmetics, brands like Glossier and Fenty Beauty are stealing market share by focusing on inclusivity and diverse skin tones. Social media has transformed how brands connect with consumers, with new cosmetic companies leveraging platforms and influencer marketing to build strong communities and engage directly with their audience.Legacy sportswear brands are responding to these challenges by tearing a page out of that book – ramping up investments in product innovation and marketing. And that may be crucial in fending off competition, but if it goes wrong, it could impact their bottom line. Most major brands have upped their advertising budgets for the summer of sports, but it might take a year or more to see whether they’ve helped legacy brands regain their footing.

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