By: Sarah Min, Originally Published in CNBC.com

Investors looking for artificial intelligence beneficiaries outside the megacap tech companies can search in a less buzzy part of markets — old economy stocks. 

Beyond this year’s tech stock leaders such as Nvidia, “it is a broader base in technology” that is set to drive future returns, Nancy Tengler, chief investment officer at Laffer Tengler Investments, said in an interview earlier this month.

“And that’s our investing theme: Old economy companies that are embracing the digital revolution and the suppliers of the digital, you know, generative AI, cloud and cybersecurity tools,” Tengler added. 

While megacap tech stocks have outperformed this year, helped by a surge of AI enthusiasm, the broader market has been left behind. In fact, while the S&P 500 is higher by 9% this year, the equal-weighted index is down by 4%. 

To be sure, Tengler is still overweight the tech sector. But searching for more traditional companies embracing digitization could help investors identify less apparent beneficiaries of the AI boom, she said. Such companies are using digitization to boost productivity and streamline operations. 

“What we really like are the companies that are embracing digitization in their business, and improving margins,” said Tengler, who holds oversized positions in the consumer discretionary, industrials and technology sectors of the market. 

One example she considers a buying opportunity is Emerson Electric. She said the engineering services provider, founded in 1890 as a maker of electric motors and fans, is improving industrial processes for its clients with its digital solutions. 

In fact, KeyBanc analyst Ken Newman initiated coverage of Emerson this month with an overweight rating, saying the artificial intelligence offerings in the company’s AspenTech software for workplace optimization is a key growth opportunity. 

“We think EMR’s transformation from a diversified Industrial conglomerate to a pure play automation company should unlock higher growth, margins, and earnings power over the course of the cycle,” Newman wrote in an October 2 note.

CNBC Pro’s analyst consensus tool shows Emerson has an average buy rating, with almost 24% upside to an average price target of roughly $110. The stock closed Wednesday at $88.83.

Another buying opportunity is Xylem, a water treatment company that is expanding its digital capabilities. Notably, Oppenheimer upgraded the stock this month to outperform from perform, saying Xylem’s acquisition of Evoqua Water Technologies this year helps set it on a path to 50% digital revenue by 2025. 

Another company Tengler likes is Carrier Global, a maker of heating, ventilation and air conditioning equipment.

Among consumer staples plays, Walmart has grown its ecommerce business and improved store productivity. McDonalds and Starbucks are two other names Tengler highlights as attractive.

She also likes Public Storage, which allows customers to open storage locker rentals online without dealing with a representative. “It’s a lot more profitable,” Tengler said. 

— CNBC’s Michael Bloom contributed to this report. 

See the original article published on CNBC.com

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