A $12 billion industrial just posted a clean Q2 beat and hiked full-year guidance. You probably don't own it.
The kicker? A slice of the AI buildout barely anyone's discussing. Yield's tiny today. The growth rate isn't. Here's why the next twelve months look tighter than the market suggests.
Top Picks (Sponsored)
Only a tiny percentage of stocks meet the criteria for this report.
Analysts have released a new edition highlighting seven names selected using multiple indicators.
Recent picks have delivered notable short-term gains, though results can vary.
The latest report is now available for a limited time.
Download the free report today.
*This free resource is being sent by Zacks. We identify investment resources you may choose to use in making your own decisions. Use of this resource is subject to the Zacks Terms of Service.
*Past performance is no guarantee of future results. Investing involves risk. This material does not constitute investment, legal, accounting, or tax advice. Zacks Investment Research is not a licensed dealer, broker, or investment adviser.
Meet the pick
Everyone keeps telling you AI needs power. Fine. True. But every hyperscale data center also needs water. A lot of it. Otherwise the racks cook themselves. No one's raising that at your Monday morning meeting.
Watts Water Technologies (NYSE: WTS). Massachusetts-based. They make valves, drainage systems, backflow preventers, water quality gear. Sounds like a snoozer. Not anymore.
Watts has been around since the 1800s, which usually means the growth story died three generations ago. Not this one. Management just guided full-year 2026 sales growth higher on what they flat-out called data center demand.
Translation: hyperscalers are tearing out old plumbing and specifying WTS gear on new builds. Cooling loops need premium flow control, and the off-the-shelf commercial stuff can't cut it. That's your angle.
At roughly $363 a share and a $12 billion market cap, this is exactly the kind of name you want to own before the sell-side wakes up and realizes AI touches a lot more than chips and utilities.
Why the data center angle is bigger than it looks
Here's the piece most people miss. Liquid cooling has gone from a specialty-rack curiosity to the default setup for GPU clusters. Full stop. You can't run a Blackwell-class training pod on hot air. Every new AI campus needs vastly more piping, valves, and water treatment than the last generation did.
Watts sits right on that line. Their commercial water systems, drainage tech, and backflow prevention gear go straight into the mechanical rooms that keep the whole site alive.
When Meta or Microsoft signs off on a two-gigawatt campus, WTS gets specified into the design. No press release. You'd never notice.
Here's the real disconnect. Consensus revenue estimates for 2026 and 2027 still model this thing like a plain-vanilla plumbing company levered to housing starts.
That's a stale model. If the AI buildout keeps pulling forward the water intensity of commercial construction, WTS gets sales estimates revised higher quarter after quarter. That's when the multiple pops.
Growth Picks (Sponsored)
Many investors are seeing solid gains in today’s market, but solid gains often hide opportunities with far greater potential.
A new analysis highlights the 5 Stocks Set to Double, selected from thousands of companies showing early signs of powerful growth.
These picks feature strong fundamentals and technical indicators that often appear before meaningful upside.
Past editions of this research uncovered gains of +175%, +498%, and +673%.
Download the 5 Stocks Set to Double. Free Today.
*This free resource is being sent by Zacks. We identify investment resources you may choose to use in making your own decisions. Use of this resource is subject to the Zacks Terms of Service.
*Past performance is no guarantee of future results. Investing involves risk. This material does not constitute investment, legal, accounting, or tax advice. Zacks Investment Research is not a licensed dealer, broker, or investment adviser.
The numbers back the story up
Q2 beat on both the top and bottom line. Management lifted the full-year sales outlook right alongside it. Not a cosmetic tweak. A real bump.
The mix is what matters. Data center orders carry better margins than the pure residential replacement stuff, so as the mix shifts, you'll see operating leverage show up in the P&L. Free cash flow's been steady. Balance sheet's clean. They keep buying back stock while raising the dividend.
Action: If you're building a position, accumulate between $340 and $365 ahead of the Q3 print later this fall. That's your window before the next update either confirms the data center narrative or extends it. |
AI warning (Sponsored)
Artificial intelligence is creating enormous opportunities—but some investors are also preparing for a very different future.
One veteran market analyst believes the next wave of AI could dramatically reshape the economy, and he's released a free briefing outlining the trends he's watching and the strategy he believes investors should understand.
Watch the Free Briefing.
Where the incremental growth is hiding
The obvious tailwind is hyperscale. The less obvious one is retrofit. Every existing data center built during the 2015 to 2020 wave was designed for air cooling. Now operators are being forced to upgrade to handle denser workloads. That's a multi-year capex cycle Wall Street hasn't sized properly.
Layer on stricter US building codes for water quality and lead-free plumbing, and you've got a regulated market where product specs favor whoever has the deepest catalog. That's Watts.
Then there's Europe, facing its own data center capacity crunch as AI training migrates offshore due to latency and energy costs. WTS has real infrastructure there. Most US industrials don't.
If rates stay "higher for longer" through 2027, what happens to dividend growth stocks?
- They get cheaper as the discount rate stays elevated — but patient buyers make a lot of money when rates eventually normalize
- They outperform — dividend growers have pricing power and real cash flows that inflation-proof returns
- They underperform significantly — the "bond proxy" premium collapses and multiples compress as bonds offer real competition
- Mixed — the highest-quality dividend growers hold up; the leveraged dividend payers and REITs get crushed
What the fundamentals actually tell you
Strip out the single-quarter noise. Here's the picture. Revenue growth reaccelerated in Q2. Guidance went up, not down. Operating margins are holding near 19%, which is respectable for an industrial.
A beta of 1.13 means it moves with the market, not against it, so you're not stuck fighting a defensive-name discount either.
The 52-week range runs from $260 to $395, so at $363 you're sitting closer to the top than the bottom. That's the honest read. But earnings power is expanding faster than the price, and a fair multiple on next year's numbers puts this in the $420 to $450 zone.
The dividend, and why it's a growth story, not a yield story
Let's be direct. Trailing yield's around 0.6% on the annual dividend. That check isn't funding your retirement anytime soon.
But the growth rate is the whole point. Watts has been hiking the payout at a double-digit clip for years, with a payout ratio well under 25%. Plenty of room to keep going. If the data center thesis plays out and earnings compound at 10% to 15% a year, the dividend grows right alongside. Own it for five years, and your yield-on-cost is a totally different conversation.
Action: Treat this as a total return name with a growing income kicker. If your portfolio needs yield today, size it as a growth position and let the dividend compound. Don't buy it expecting a 4% check next quarter. You won't get one. |
The risks you need to know
Two things could break this. First, if hyperscaler capex hits an air pocket, WTS growth decelerates fast and the multiple compresses right with it. The AI capex trade isn't a one-way street, and you got a taste of that in the tech selloff earlier this summer.
Second, US housing. A meaningful chunk of the residential replacement business still ties back to renovation activity. With the 10-year around 4.77%, mortgage rates aren't giving you a break. A drawn-out housing slump would offset some of the commercial upside.
And the stock isn't cheap on a trailing basis. You're paying up for growth here. Miss the raised bar in Q3 or Q4 and expect a sharp reset. That's why the entry range matters. Don't chase above $370.
Putting it together
Watts Water is an infrastructure name that just got dragged into one of the decade's biggest capex cycles, and the market's still pricing it like an old-line plumbing supplier. The Q2 beat and raise told you the data center demand is real. The dividend track record gives you a way to compound alongside the fundamentals.
Want an industrial with a genuine AI-adjacent tailwind, a fortress balance sheet, and management that returns cash steadily? This fits. Buy the range. Size it as a growth position. Let the next few quarters of earnings revisions do the work.
Action Recap
✅ Buy Zone: $340 to $365
✅ Catalysts to Watch: Q3 earnings later this fall, any hyperscaler capex commentary, dividend review typically announced in Q4
✅ Medium-Term Target: $420 to $450 over 12 to 18 months
✅ Risk Management Tip: Reassess below $310. If the AI capex narrative cracks, the multiple compresses fast.
Setup Scorecard
Entry Zone: $340 to $365
Target: $420 to $450 over 12 to 18 months
Stop Loss: Reassess below $310
Catalyst Timeline: Q3 earnings late October or early November, Q4 dividend review, ongoing hyperscaler capex updates through year-end
Confidence Level: Medium-High. The data center thesis is real and management just validated it. But the stock isn't cheap, and it needs continued execution to justify the multiple.
That’s all for today’s edition of the Dividend Brief.
Thanks for reading, and if you have any feedback or dividend stocks you want me to take a look at, just reply to this email!
—Noah Zelvis
DividendBrief.com
