A small set of well-known mega-cap companies that are best positioned to capitalize on the emergence of artificial intelligence have driven stock markets for about the past year, but Fidelity Portfolio Manager Dan Sherwood has his sights set on select mid-cap firms across various sectors that he believes could benefit from growing demand for AI infrastructure.
“Even though there may be some risk of short-term overexuberance for AI-driven businesses, I continue to believe that AI is still in the early innings of innovation in what I believe will be a technology with a long runway,” explains Sherwood, who manages Fidelity® Mid-Cap Stock Fund (FMCSX).
The fund is a diversified domestic equity strategy that tends to focus on companies valued at $1 billion to $15 billion across the growth-to-value universe and occasionally owns stocks with higher market capitalizations. Sherwood focuses on fundamentally strong mid-cap companies that are underappreciated by investors, particularly when the earnings forecast for a company deviates from consensus.
For example, in the tech hardware & equipment industry, he cites three companies that he believes stand to benefit from AI: contract manufacturer Fabrinet (FN) and optical component providers Coherent (COHR) and Lumentum Holdings (LITE) – all outsized fund positions as of December 31.
Sherwood also is bullish on investments in software vendors that are leveraging AI to improve their products. For example, he cites Monday.com (MNDY) as a platform that has incorporated AI to automate steps for customers building custom project management solutions. In addition, Sage Group (SGPYY) offers what it calls an AI copilot designed to improve efficiency for customers of its core, small-business, enterprise resource planning software offering, he says.
Outside of tech, Sherwood points to several mid-cap industrial firms in the portfolio he sees as well-positioned amid the multiyear build-out of data centers, including Vertiv Holdings (VRT), which makes power, thermal and rack management systems, as well as mechanical and electrical contractors Emcor Group (EME) and Comfort Systems (FIX), which offer specialized labor capabilities that can ease a key bottleneck for hyperscalers’ data-center growth plans.
Other key AI opportunities, according to Sherwood, are in the energy and utilities sectors, where Cameco (CCJ), a uranium mining company, and Vistra (VST), an independent power producer, can offer AI hyperscalers clean, 24/7 nuclear generation for electricity to power data centers.
“Power is critical to the build-out of AI infrastructure, and the existing electrical grid is already under stress while AI workloads use 10 times the amount of electricity as traditional computing capacity,” Sherwood explains. “So, the tech industry needs to find new sources of power to support their growth plans.”
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Dan Sherwood is a portfolio manager in the Equity division at Fidelity Investments.
In this role, Mr. Sherwood manages the Fidelity New Millennium Fund and co-manages Fidelity New Millennium ETF, Fidelity Advisor Mid Capp II Fund and VIP Mid Cap Portfolio.
Prior to assuming his current responsibilities, Mr. Sherwood was a research analyst responsible for covering a variety of software and IT services companies. Additionally, he was a research analyst on the Real Estate team, where he covered various real estate investment trusts (REITs) and other real estate related companies.
Before joining Fidelity in 2008, Mr. Sherwood was a vice president at Merrill Lynch Institutional Equity Trading, and an analyst for Merrill Lynch Institutional Equity Sales. He has been in the financial industry since 1998.
Mr. Sherwood earned his bachelor of arts degree from Yale University and his master of business administration degree from The Wharton School of the University of Pennsylvania.