AI Investing Update: My Latest Research on One Stock to Buy – And Three to Avoid
Editor's Note: Today's issue of TradeSmith Daily comes from Jason Bodner and was first featured in his free Power Trends newsletter. While artificial intelligence (AI) may be one of the hottest topics on Wall Street, not every AI stock is worth owning. Jason is here to show you the difference between a "winner" and three "wannabes."
Even with four months left 'til the end of the year, I think we can say (with confidence) that the emergence of artificial intelligence will go down as one of the biggest stories of 2023.
Biggest … with an impact that will last for years.
AI is one of the hottest topics around. Companies are falling all over themselves to work AI announcements into the quarterly reports.
Investors are buying all things AI.
And stocks are soaring.
I get it. AI is clearly a transformational technology. I'm excited about it, too.
And I've been excited for years.
I've been studying AI, machine learning, database architecture, and algorithm construction for nearly a decade. And I'm incorporating more of it into my stock-picking system to bolster our already high success rate — and give us that necessary "edge" to keep us ahead of the always-aggressive Wall Street.
I knew that AI would open a hefty wealth window.
But here's where you need to be shrewd. You want to buy reality… and beware of the hype.
You want to think and act independently… and not follow the crowd.
Do that and you'll cash in on AI's promise.
And today I'm going to show you one way to do just that…
According to The Ascent, in a survey of American adults, 54% of respondents had asked ChatGPT for financial advice.
Traditional financial service companies like Morgan Stanley are already developing A.I. bots for over 16,000 of its advisors that will give instant answers – and their clients a leg up on everyone else.
But the thing is... you don't have to wait for more developments in A.I. for the chance to start making money.
We've been at the forefront of A.I. stock investing, and we want to show you something so you aren't left in the dark anymore...
Manias are part and parcel of the stock market — always have been and always will be. Stocks in general back in 1929, dot-com plays in 1999 and 2000, housing in the middle 2000s, and COVID stocks in 2020.
And AI stocks today.
This year's AI mania was ignited back in November with the release of ChatGPT, which stands for Chat Generative Pre-trained Transformer. (I wonder if the bot named itself.)
ChatGPT's main purpose is to think, write, and talk like a real person. But it does more — a lot more. It can write computer programs, compose music, craft essays, play games, and solve math problems.
Students are using it for schoolwork — to teachers' chagrin — and even some scientific papers list ChatGPT among credited authors.
Like any paradigm-shifting invention, these "changes" have triggered debate. The technology itself — and the mania it ignited — raise all sorts of ethical questions. Like: "How do we know if text or images were generated by a human or a bot?" Or "Will this 'machine' take my hard-won job?"
But those worries aren't impeding the AI stampede. Every company and every investor seem to "want in" on the action.
Alphabet Inc. (GOOGL) followed with its own chatbot — called Bard. Bard is integrated into Google Search, which is Alphabet's biggest source of revenue by far.
One day after Bard was introduced, Microsoft Corp. (MSFT) stepped up for its own announcement. Microsoft was already an AI player and a big investor in OpenAI, the company that developed ChatGPT. Microsoft provides the cloud-computing power to run ChatGPT, and it uses ChatGPT.
But it announced an updated version of the Bing search engine that would incorporate a juiced-up version of ChatGPT. Want to plan your vacation? Just ask Bing and ChatGPT to do it for you. (I'll pass, thank you.)
Outside the U.S. market, China tech giant Baidu Inc. (BIDU) introduced Ernie Bot, which is a much better name if you ask me. Fellow Chinese tech giants JD.com Inc. (JD) and Alibaba Group Holding (BABA) joined the frenzy.
These are all giant corporations increasingly turning to AI. Now let's look at the challengers vying to achieve household-name status.
The (High) Flyers
By challengers, I'm talking about AI startups whose shares are zooming as investors hope for lottery-ticket windfalls.
Let me be candid: It's always possible one of these lottery tickets "hit." But the odds are against you. And if you buy in a frothy frenzy — like a lot of folks did with the dot-com bust — you will be buying at the top. The "hit" you take will be right in the gut.
Let's first talk about the best-known startup that's not an investing option. Open AI, the parent of ChatGPT, is a private company. And, as CEO Sam Altman said this summer, it won't be going public anytime soon.
Said Altman: "When we develop superintelligence, we're likely to make decisions that public market investors would view very strangely" — meaning it's better to stay private.
I don't know whether to admire that, be afraid — or both.
One public company that's getting a lot of attention is C3.ai Inc. (AI) — which gets bonus points for having AI as its ticker. C3.ai makes software that helps companies develop and deploy AI applications across their businesses. The stock traded 1.5 million shares on the first day of 2023. Today, it averages nearly 27 million shares a day.
C3.ai's shares have surged 177% here in 2023.
Shares of a similar company, BigBear.ai Holdings Inc. (BBAI), have soared 145%. But SoundHound AI Inc. (SOUN) tops the list with a 178% gain.
Sounds juicy, doesn't it?
But… look back to the beginning of 2022 and it's a whole different story. C3.ai has gained a strong 66%, but BBAI and SOUN are way down, losing 67% and 84%, respectively.
Even more recently, all three are significantly below their 2023 highs — from a 33% drop in AI to a 47% drop in BBAI and a 73% plummet in SOUN.
Anyone who bought those based on hype is feeling the pain right now.
The truth is it's way too early to know how many — if any — of those stocks will be big winners.
It's possible, yes. But not necessarily probable.
Just like with a lottery ticket.
My Quantum Edge system is based on probability — the ability to predict with high degrees of certainty which stocks will be winners… and which ones you should avoid.
There's not yet enough "history" with these early-stage companies to calculate real odds — to make a succeed-or-fail prediction. I suppose we could offer one based on the hype, but you and I both know how risky that can be. Stocks that are white hot today can just as easily be abandoned tomorrow.
After decades of research and back testing massive data sets, I know the stocks most likely to make you money are those of healthy-and-growing companies (strong fundamentals) in an uptrend (strong technicals) that are also being bought by Big Money players.
Every day at 2 a.m. my computers go to work retrieving the latest data so my algorithms can start their number crunching — and generate Quantum Scores for more than 6,000 stocks.
And that includes Quantum Scores for the AI startups we've just spotlighted.
Let's take a look… and I'll share the story these numbers are telling me:
C3.ai Quantum Score: 43.1. That's way down from the mid-60s earlier this year, and definitely too low a score for me to even think about buying the stock. The Quantum Score "sweet spot" is typically in the 80s.
The Quantum Score incorporates two other metrics — one based on fundamentals (the company's finances) and the other on technicals (the strength of the stock). And AI's incredibly low Fundamental Score of 25 (thanks to earnings shrinking, negative profit margins, and other factors) tells me the risk is way too high.
BigBear.ai Quantum Score: 34.5. This was literally a penny stock (trading under $1) at the beginning of the year. Its Fundamental Score is a paltry 12.5, with about the best thing we can say is that it has no debt. BigBear is still losing money, and its seven quarterly reports as a public company have all been below expectations.
SoundHound AI Quantum Score: 39.7. SOUN went public in April 2022. It nearly doubled to $15 after its debut, but it quickly lost two-thirds of its value and has remained under $5 for more than a year. Its Fundamental Score of 8.3 is about as low as I've ever seen.
These startups may flare up as red-hot AI stocks from time to time, but that also means investors have a higher chance of getting burned.
Bigger isn't always better, but at this early stage of AI's emergence, companies with the deepest pockets are the ones that can develop the technology and incorporate it into their products quickly.
Companies like Microsoft, which I like a lot for the long haul. And if you want to invest in AI, this stock would top my list right now.
Microsoft is a really well-run company that sits at the intersection of multiple tech trends, not the least of which is AI. It sports a strong Quantum Score of 72.4. It rates well in both Fundamentals (70.8) and Technicals (73.5), which is a great balance.
And for the icing on the cake, you can see my system has picked up 15 Big Money buy signals (the green bars below) so far in 2023. Also, note there are zero sell signals.
AI is an amazing technology. It's finding its way into more and more products and becoming a bigger part of our daily lives. I am incorporating it even more into my Quantum Edge system to boost my data-analysis capabilities and build on our already proven ability to identify the best opportunities in the market.
You can't do that based on one corporate announcement, hype, or the latest cool thing that gets everybody's attention. You need data, and some of the newer AI stocks just don't have it yet.
That makes them "bets," not investments.
Be careful if you go that route. You might get lucky and catch a rally. But you could also end up with a big hole in your pocket.
And that's the problem. There's no way to really know.
That rookie quarterback playing in his first NFL game might be the next Tom Brady, or he might be the next Ryan Leaf. (If you don't know who that is, it proves my point.)
Stick to the companies with proven fundamentals, strong technicals, and Big Money buying — whether they are a player in AI or any other industry.
I'm living proof. And no, I'm not a bot.
Talk soon,
Jason Bodner Editor, Jason Bodner's Power Trends
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