Can AI Beat the Market? 5 Stocks to Watch
Can artificial intelligence successfully identify high-potential equities? Here are five stocks to watch over the next few months to find out.
If artificial intelligence (AI) is eating the world, it was only a matter of time before stock-picking showed up on its menu.
Traditionally, powerful artificial intelligence systems – and the high-octane brainpower needed to develop them – that target stocks to watch have been available only to hedge funds, quant funds and a select group of asset management firms.
Danel Capital, a financial advice company, aims to change that. The firm wants to democratize AI, big data technology and machine learning to help regular investors make smarter decisions with their stock portfolios.
Here's how it works:
The company's AI algorithms analyze more than 900 fundamental, technical and sentiment data points per day for 1,000 U.S.-listed shares and 600 stocks listed in Europe. Danel says that in total, its AI predictive scoring capability churns through 10,000 daily indicators. The platform then analyzes that huge amount of data to predict the future performance of each stock, calculating the probability of beating the market over the next four months.
Once the algo determines which stocks to watch, it spits out a rating known as a Smart Score, which ranges from 1 to 10. Danel says that, on average, stocks with the highest Smart Scores of nine or 10 almost doubled the S&P 500's annualized returns from January 2017 to July 2020.
Note well that we're talking about the probability of beating the market over the next few months or so, not days. That makes the platform useful for tactical investors, not day traders.
It's an interesting system that makes some pretty counterintuitive stock picks. Whether it proves to be a useful tool for retail investors remains to be seen, but it's worth keeping an eye on.
Here are five stocks to watch based on Danel Capital's January list of stocks with the highest probability of beating the market in the medium term. They all have perfect Smart Scores of 10. For good measure, we also took a look at some fundamentals, technicals and analyst research on these names.
Data is as of Jan. 11.
- Market value: $22.3 billion
- Smart score: 10
Few stocks are as primed for a post-pandemic rebound than those found in the cruise industry, and investors in Carnival (CCL, $20.14) must be praying that CCL is more spring-loaded than most.
The algos sure seem to think so, anyway, giving it a perfect Smart Score of 10.
And as we learned Monday, the parent of Carnival Cruise Line is making progress as it weathers the current storm. CCL said it expects to report a net loss of $2.2 billion for the quarter ended Nov. 30. Yes, that's wider than analysts' forecast of a loss of $1.6 billion, according to S&P Global Market Intelligence, but some other critical news was more encouraging.
CCL's cash burn rate was slightly better than expected, said CFO David Bernstein, adding that company has "the liquidity in place to sustain ourselves throughout 2021, even in a zero-revenue environment." Furthermore, the company's advanced bookings for the first half of 2022 are ahead of 2019, CCL said, which "demonstrates the long-term demand for cruising."
Analysts surveyed by S&P Global Market Intelligence have an average recommendation of Hold on the stock, which means they expect it to perform in line with the broader market over the next 12 months.
But the algo's Smart Score suggests a high probability of market-beating returns over the next four months, putting CCL among the top stocks to watch at the moment.
- Market value: $2.5 billion
- Smart score: 10
Like CCL, EPR Properties (EPR, $33.20) is a bet on post-pandemic pent-up demand. The real estate investment trust (REIT) holds a portfolio of amusement parks, theaters and ski resorts – in other words, the sorts of places getting crushed by COVID-19.
But Danel Capital's perfect 10 Smart Score on EPR suggests the stock looks like a great candidate for outperformance over the next few months. Investors sure could use the gains. EPR has lost more than half its value over the past 12 months.
Among the reasons EPR is among the algo's stocks to watch might be its technicals. EPR formed a so-called golden cross in late December. The technical trading pattern, in which a stock's short-term moving average crosses above its long-term moving average, is considered to be a strong buy signal.
More fundamentally, the firm's situation is making incremental improvements. Fourth-quarter cash collection came to 46% of pre-COVID contractual cash revenue, EPR said, which is up from a second-quarter low of 28%. The higher collections and pay-down of debt allows the company to be cash flow positive, EPR said.
Wall Street analysts are more cautious on the name, with an average recommendation of Hold, according to S&P Global Market Intelligence. In the more immediate term, however, Smart Score says EPR is worth buying.
- Market value: $205.3 million
- Smart score: 10
GTT Communications (GTT, $3.40) is another opportunity to buy a stock that the market has mostly shunned, assuming its perfect Smart Score is right.
The company, a global Tier 1 internet network provider, went on an aggressive acquisition spree under former CEO Rick Calder, and now it's paying the price. Indeed, GTT's long-term debt ballooned to $3.3 billion as of March 2020 vs. the $725 million it owed at the end of 2016.
Digging its way out of the mess, the company recently pleased shareholders by securing a new $275 million term loan agreement. It's also selling assets, the proceeds of which "will be used to reduce debt and invest in returning to positive organic growth," says William Blair equity research, which rates GTT at Buy.
With shares down more than 90% over the past three years, they finally may be set for a bounce, analysts say. Of the four analysts covering GTT tracked by S&P Global Market Intelligence, one says Strong Buy and one calls it a Buy. One analyst says Hold and the remaining call is Sell.
Their average recommendation comes to Buy, meaning they expect it to outperform the market over the next year or so. Their average target price of $7 certainly suggests a pay day, as it gives GTT implied upside of more than 100%.
Still, handle GTT with caution. The firm has been delinquent in sending in its quarterly filings to the SEC, prompting a warning from the NYSE, and the firm announced a change in CFO in December.
- Market value: $4.0 billion
- Smart score: 10
It's no secret that the pandemic-caused collapse in air travel has punished air carriers and airplane manufacturers. Less attention has been paid to the hundreds of suppliers that are also getting slammed – and just might be bargains at current levels.
Shares in Hexcel (HXL, $48.27), which provides high-tech materials and components to the aerospace and defense industries, have lost about a third of their value over the past 52 weeks. That, among other factors, has landed HXL among the algo's stocks to watch.
Some humans like it too. Technical analysts at Bank of America Global Research recently named HXL to their Top 10 U.S. Quarterly Ideas for Q1, citing the stock's improving technicals, on both an absolute basis and relative to the S&P 500.
Including fundamentals factors, CFRA Research rates HXL at "Strong Buy" with a $55 price target on the stock.
"We think shares are significantly undervalued based on HXL's still sizable long-term FCF potential, with our target price a conservative 38% below HXL's pre-pandemic peak," CFRA says.
Of the 16 analysts covering the stock, two say Strong Buy, nine have it at Hold, two call it a Sell and three say Strong Sell.
- Market value: $26.9 billion
- Smart score: 10
One equity that the algos and the Street alike have among their stocks to watch is Splunk (SPLK, $166.51). The tech firm, which makes software for searching, monitoring and analyzing machine-generated big data, gets a perfect Smart Score as well as high marks from analysts.
The investment thesis has a number of moving parts, but at its core is the accelerating shift toward cloud-native applications, functions and serverless technology, among other capabilities. Splunk is changing the way it does business to fully take advantage of the trends, despite some short-term pain.
"The company's business model transition has led to some ugly financials in the current fiscal year," says Argus Research, which rates shares at Buy. "However, we have seen both Adobe and Autodesk move through the same transition from perpetual licensing to ratable licenses and come out as stronger, faster-growing, and higher-margin companies. We think that Splunk that will be able to accomplish the same."
A Smart Score of 10 suggests a high degree of probability SPLK will outperform the S&P 500 over the next few months. Wall Street likes its prospects even beyond that, with an average recommendation of Buy.
As for the breakdown of recommendations: 13 analysts rate the stock at Strong Buy, 11 say Buy, 15 rate it at Hold and one calls it a Strong Sell. Their average price target of $206.22 gives SPLK implied upside of more than 23% in the next 12 months or so.