Everyone loves artificial-intelligence stocks—everyone except value investors. Thankfully, their turn might be coming soon.
You don’t need a Barron’s columnist to tell you that AI has mattered a lot for the market. Everyone and their barber and cabbie already know that it’s one of the big themes driving stocks higher. According to a March 21 Société Générale note, the
would be trading 700 points lower without the AI boom. What’s more, excluding the earnings of
companies from the S&P 500 would have resulted in profits falling for two consecutive years.
AI is one reason, probably the primary one, that the
exchange-traded fund has returned just 20%, including reinvested dividends, over the past 12 months to the
ETF’s 39% return. It certainly helps that
Nvidia
,
up 240% over the past year, is the third-largest holding in the Growth ETF, while
which occupies the same spot in the Value ETF, is up just 9.4%.
But signs are emerging that investors are rotating out of growth stocks and into value. This past Wednesday, Nvidia dropped 2.5%, making it the third-worst performer in the S&P 500, and the stock was down 0.1% over the five days ended March 27 even as the S&P 500 rose 0.6%. Exxon gained 1.8% over the same period.
The rotation out of obvious AI plays, if it is occurring, isn’t likely to change the fact that artificial intelligence is—and will remain—one of the market’s most investible themes. It does mean that the type of stock that outperforms because of it may be ready to change. Citigroup strategist Scott Chronert advises looking at the stocks as three particular groups—creators, enablers, and users of the technology—with a focus on the latter. “To us, broadening Artificial Intelligence beyond the enablers of its build out, and the creators of the initial technology, should help reduce this risk,” he writes.
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So should a focus on valuation. For growth investors, it means deciding how much to trim the stocks that have run and where to put the cash from profit-taking, while continuing to bet on AI. For that purpose, Chronert created a basket of AI stocks trading at a reasonable price, which includes
Block
,
Etsy
,
and
Visa
,
among others.
As the market broadens out, value investors should also get their chance to participate in the AI boom. Chronert created another basket of AI stocks that are cheap relative to their industries, but also are expected to see profit margins expand. They include
RTX
,
and
But don’t overlook copper miners. Nvidia has made it clear that it will start using more copper to connect network computers that are less than a meter apart, and the metal is likely to be used even more as AI grows. The need for electricity to power data centers will also require more copper, according to J.P. Morgan analyst Dominic O’Kane—an additional four million tons or so by 2030, he calculates. That’s set to benefit copper companies of all stripes, but particularly diversified miner
last week’s Barron’s stock pick, and
J.P. Morgan’s top North American pick. “A new AI demand impulse has the potential to materially influence future copper deficit/surplus assessments,” O’Kane says.
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And finally get mining stocks moving again.
Write to Ben Levisohn at Ben.Levisohn@barrons.com
