Can AI Beat the Market? 10 Stocks to Watch
An artificial intelligence (AI) system identifying high-potential equities has been on the mark in 2021. Here are its 10 top stocks to watch over the next few months.
Artificial intelligence (AI) isn't new to the world of stock picking, but it hasn't really been an option for retail investors. That is, until now.
Traditionally, powerful artificial intelligence systems – and the high-octane brainpower needed to develop and run 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 all that.
Danel boasts a new analytics platform that harnesses the power of big data technology and machine learning. The idea is to help regular investors make smarter decisions with their tactical stock picks.
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 ocean of inputs to predict the future performance of each stock, calculating its probability of beating the market over the next 90 market days.
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 9 or 10 have implied annualized returns of almost 26%. That's nearly twice the model's implied annualized return of 13.8% for the benchmark S&P 500.
The track record is just as encouraging. In a backtest run from Jan. 1, 2017, through Nov. 16, 2020, an equally weighted portfolio of U.S. stocks with perfect 10 Smart Scores – rebalanced every 90 market days – delivered a cumulative gain of 128%. That beat the S&P 500 by almost 64 percentage points over the same period.
Here are 10 stocks to watch with perfect 10 Smart Scores as of June 24, as Danel Capital's AI platform says these picks have the highest probability of beating the market over the next few months. For good measure, we also took a look at what Wall Street analysts had to say about these names.
And remember: We're talking about the probability of a stock beating the market over the next few months or so, not days, and not years. That means the platform is moreso pointing out the best stocks to buy for tactical investors, but not necessarily day traders nor long-term investors.
Share prices and other data are courtesy of S&P Global Market Intelligence as of June 29, unless otherwise noted. The Smart Score comprises three subcategories for fundamentals, technicals and sentiment, but it is not an average of those other scores; rather, it is a predictive score based on all the data available for a stock. Smart Scores are as of June 24.
10. Umpqua Holdings
- Market value: $4.0 billion
- Smart Score: 10
Shares in financial firm Umpqua Holdings (UMPQ, $18.32) are up 21% in 2021, beating the broader market by 7 percentage points at the moment. But if the signals picked up by Danel Capital's AI algorithms are correct, investors ain't seen nothing yet.
Indeed, UMPQ's perfect Smart Score of 10 suggests shares are set to break out over the next few months. And that's after gaining 25% for the year-to-date through June 25. (The S&P 500 added 14% over the same span.)
Umpqua – a community bank with branches in Oregon, Washington, California, Idaho and Nevada – is grappling with issues common to regional banks.
For example, ultra-low interest rates, which put pressure on net interest margin (the difference between what a bank pays for deposits and charges for loans), are an industry-wide challenge. Loan growth could be stronger. And, in UMPQ's case, mortgage-banking income in the most recent quarter came up short of some analysts' estimates
Like many of its peers, UMPQ is responding by cutting costs in a bid to boost profitability.
"The execution of (cost-saving 'Next Gen') initiatives should drive greater efficiency and higher profitability," says Wedbush analyst David Chiaverini, who rates shares at Neutral (the equivalent of Hold). "The company's outlook is appropriately reflected in its valuation."
The Street as a whole is slightly more bullish than Wedbush, giving the stock a consensus recommendation of Buy.
If analysts' longer-term outlook is fairly bright, the short-term view is even better, according to Danel's platform. Umpqua gets a score of 9 out of 10 for fundamentals, an 8 for technical strength and a more moderate 6 for sentiment, putting it firmly on the radar of stocks to watch over the next few months.
Importantly, the bank's Smart Score – the sum total of the AI system's underlying metrics – has been in a strong uptrend since mid-May, and has sat at a perfect 10 for three consecutive weeks.
9. M&T Bank
- Market value: $18.8 billion
- Smart Score: 10
M&T Bank (MTB, $145.85) is another larger regional bank on this list of stocks to watch that has earned a perfect total score. Where the lender really stands out is in its sentiment reading, which stands at 10. Fundamentals get a 9, but marks for technical analysis are a more middling 6.
Like UMPQ, the bank's Smart Score entered an unbroken uptrend in May, and has notched perfect 10 ratings on a weekly basis for four straight weeks. Although fundamentals have remained robust, what's really been driving M&T Bank's strong buy signal is a steep pick up in the AI's sentiment indicators.
Interestingly, sentiment scores are rallying at the same time as MTB's stock has been cooling off. Shares are off about 8% over the past month, which, all things being equal, should make the valuation more compelling.
Analysts are split on the name, giving it a consensus recommendation of Hold, per S&P Global Market Intelligence. Interestingly, one set of pros who are high on the MTB are the quants at Bank of America Global Research.
Quantitative analysis – a sort of cousin of AI – conducted at BofA singles out M&T Bank "as offering a rare combination of quality and recovery."
More cautiously, Argus Research analyst Stephen Biggar rates shares at Hold, citing "flat net interest income due to lower interest rates."
Note well that in February, M&T agreed to acquire People's United Financial (PBCT) in an all-stock transaction valued at $7.6 billion. (PBCT also makes our list of top AI stocks to buy now, as we'll see below.)
Although Argus's Biggar applauds the tie-up of regional lenders, the implications for MTB stock are already baked in.
"We think the deal makes strategic sense for several reasons," Biggar says in a note to clients. "While we expect the merger to provide long-term advantages, we believe that MTB's current multiple of 12.6-times our 2021 (earnings per share) estimate adequately reflects the company's current outlook."
8. Unum Group
- Market value: $5.8 billion
- Smart Score: 10
Shares in Unum Group (UNM, $28.18) are up by about a quarter so far in 2021, beating the broader market by a wide margin.
Naturally, that gives some analysts pause, and they cite valuation as a reason for standing on the sidelines. But even as the Street's consensus recommendation stands at Hold, Danel Capital AI model sees UNM delivering yet more outperformance in the months ahead.
Shares in the supplemental life and disability insurance company have a perfect 10 Smart Score, led by high marks for fundamentals and sentiment. Indeed, on a fundamental basis, the stock scores 8 out of 10, helped by high grades on metrics such as revenue growth, gross margin, dividends paid and total current assets.
As for sentiment, UNM scores a perfect 10, led by implied upside to price targets and statistical deviation among price targets.
Unum makes Danel's list of stocks to watch because of its impeccable and near-impeccable scores for sentiment and fundamentals, respectively, which more than offset a middling rank of 5 for technical traits. UNM had a perfect score for technicals as of April 19, but it has been in a downtrend ever since. Its Smart Score, on the other hand, has been perfect on a weekly basis over six of the past 10 weeks, never falling below 8 over that span.
UBS Global Research, which rates the stock at Hold, notes that COVID-19 mortality once again hurt UNM's life insurance operations in the most recent quarter, but benefited its long-term care business at the same time. The company has responded with cost controls and expects a recovery in the second-half of 2021, as the pandemic continues to abate, analyst Brian Meredith notes.
Although analysts are collectively neutral on UNM – one rates it at Strong Buy, nine say Hold and one calls it a Sell – they have been so throughout the stock's strong run. Indeed, their consensus recommendation hasn't budged from Hold over the past 52 weeks – a span in which shares rose more than 80%.
7. BOK Financial
- Market value: $6.1 billion
- Smart Score: 10
Shares in BOK Financial (BOKF, $87.14), a regional bank operating primarily in the Southwest and West, are likewise riding the great recovery trade in financial stocks. And after a run of more than 26% for the year-to-date, an assessment by Danel Capital's AI algos expects even more outperformance in the weeks and months ahead.
BOKF gets a 9 for fundamentals – a level it has maintained for three of the past four weeks. Indeed, it logged a perfect 10 for fundamentals in four of the past seven weeks. Sentiment, with a score of 7, has been in an uptrend for more than a month, and has reached its current level in three of the past four weeks.
Where BOKF gets more middling marks is in its technical aspects, getting a score of 5 for two straight weeks. Indeed, its technical grade hasn't dipped this low since early April.
Despite the somewhat uneven marks, the algo's weighting system still believes BOK Financial is among the market's top stocks to watch. BOKF's perfect Smart Score is Danel's signal to tactical investors that they can count on the bank to keep the price returns coming.
The Street is less bullish on the name at this time, at least as a longer-term buy at current prices. Analysts' consensus recommendation stands at Hold. Of the 10 pros covering BOKF tracked by S&P Global Market Intelligence, one rates it at Strong Buy, while nine have it at Hold.
Raymond James analyst Michael Rose rates BOKF at Market Perform (the equivalent of Hold), citing issues in the bank's first-quarter earnings report that are fairly common among the nation's regional banks these days.
"All in, (Q1) results were again mixed where a net reserve release and lower core noninterest expenses more than offset the impact of softer core revenue," Rose wrote in a note to clients. "Credit trends continued to improve … while stringent expense control and lower incentive compensation fueled a reduction in core noninterest expenses."
6. State Street
- Market value: $28.4 billion
- Smart Score: 10
Asset manager State Street (STT, $81.68) is best known to retail investors for its SPDR brand of exchange-traded funds (ETFs). But anyone not indexing their money through its products, and instead betting on STT itself, will be pleased to hear that AI predicts a hot few months ahead for the stock.
STT gets a perfect 10 Smart Score based on near-perfect underlying component metrics, landing it on the AI platform's top stocks to watch. Shares get a 10 for fundamentals, a 9 for technicals and an 8 for sentiment.
Highlights driving the impeccable fundamentals rating include stellar marks for operating income, trailing 12-month income and diluted EPS. Meanwhile, strength in a series of technical indicators and a high long-term earnings growth forecast help boost STT's marks for technicals and sentiment, respectively.
Shares in State Street are essentially in line with the performance of the S&P 500 for the year-to-date, but only after cooling off of late; STT had been beating the benchmark index for much of 2021.
But now AI suggests that STT is due for a big leg up in the shorter term. That would be a welcome reversal after losing about 5% over the past month.
The Street's consensus recommendation on the stock stands at Buy, but with mixed conviction. Argus Research, for example, rates shares at Hold, citing the usual culprit of low interest rates, among other factors.
"The company's fee revenues held up well (in Q1), helped by a rebound in market valuations, but lower interest rates continued to hurt net interest income," says Argus Research analyst Stephen Biggar.
On the bulls' side, CFRA Research analyst Cathy Seifert rates shares at Buy, citing an improved outlook.
"We see net interest income stabilizing in Q2 given yield curve steepening and slowing mortgage-backed securities premium amortization," Seifert says.
5. Prosperity Bancshares
- Market value: $6.7 billion
- Smart Score: 10
Shares in Prosperity Bancshares (PB, $71.86) are lagging the broader market by a wide margin so far in 2021, up just 4% to date. But both Wall Street analysts and Danel Capital's AI model expect performance to pick up smartly soon.
The Texas-based regional bank's stock is up less than 4% for the year-to-date, trailing the S&P 500 by about 11 percentage points. It lags the benchmark index by an even wider margin over the past 52 weeks.
But especially strong scores for sentiment and fundamentals – and improving marks for technicals – suggest PB is ready for takeoff.
The stock scores a 9 for sentiment under Danel Capital's AI system, boosted by ESP estimates and positive insider translation activity. Meanwhile, perfect marks for elements of balance-sheet health, profit margins and other cash flow from financial activities give PB an 8 for fundamentals. Technicals get a more middling grade of 6, weighed down by so-so momentum indicators, among other metrics.
The Street, meanwhile, gives PB a consensus recommendation of Buy. One reason analysts cite for being bullish is the prospect of the bank making yet another acquisition.
"Ultimately, we expect PB to utilize the excess capital to acquire another bank, but predicting the timing is always a challenge," says Piper Sandler analyst Brad Milsaps, who rates shares at Overweight (the equivalent of Buy).
The analyst also cites PB's lagging share price and compelling valuation as a reason for investors to pounce at current levels.
"The current (price-to-earnings) discount to peers along with the YTD underperformance could provide an attractive entry point for investors seeking exposure to a high-quality name," Milsaps says.
Raymond James analyst Michael Rose (Outperform) reminds clients that Prosperity Bancshares "has been among the most active acquirers over the past 20-plus years," with more than 30 acquisitions completed since 1998.
4. PacWest Bancorp
- Market value: $4.9 billion
- Smart Score: 10
PacWest Bancorp (PACW, $40.77) stock is on a tear in 2021, and the algos say it's primed to deliver even more outsized gains over the next few months.
The Wall Street brain trust certainly agrees. Analysts' consensus recommendation stands at Buy, and with fairly high conviction. Five pros rate shares at Strong Buy and three say Buy, while the remaining two have PACW at Hold, per S&P Global Market Intelligence.
As for Danel's assessment, PACW's perfect Smart Score comprises marks of 8 for fundamentals, 7 for technicals and 6 for sentiment.
Although none of those scores hits it out of the park in isolation, recall that Danel Capital's AI Smart Score is not an average of the component scores. Rather, it's a predictive score based on all the data available.
Furthermore, PACW has managed to make its way atop Danel's top stocks to watch, attaining a perfect 10 Smart Score in four of the past six weeks. The stock is also sitting in a three-week streak of 8s for fundamentals. Balance-sheet strength and profitability are just a couple of the robust inputs driving PacWest's high marks for fundamentals.
Although PACW gets a middling score of 6 for sentiment, it does enjoy high implied upside from price targets. Analysts' average price target of $50.05 gives the stock implied upside of more than 20% in the next 12 months or so, according to S&P Global Market Intelligence.
Indeed, that's partly why Piper Sandler named PacWest Bancorp as one of its top stock picks.
"We continue to like PACW for its industry-leading profitability at only 10.8 times our 2022 EPS estimate," says analyst Matthew Clark (Overweight). "Restoring organic loan growth is the next leg of the stool now that a more benign credit experience is playing itself out."
Raymond James analyst David Long concurs with both AI and the Street's optimistic outlook, and says shares are a bargain, to boot.
"We remain bullish on PACW shares and believe the current discounted valuation on a P/E basis represents an attractive entry point," says Long, who rates the stock at Strong Buy.
3. Principal Financial
- Market value: $17.1 billion
- Smart Score: 10
Like many of Danel Capital's stocks to watch, Principal Financial (PFG, $62.96) is riding the sector's broad recovery and putting up outsized year-to-date gains.
Indeed, shares in the investment manager and insurance firm have almost doubled the performance of the broader market in 2021. And although analysts have moved as a group to the sidelines, Danel Capital's AI model sees the momentum continuing.
The Street's consensus recommendation stands at Hold. Of the 11 analysts issuing opinions on PFG tracked by S&P Global Market Intelligence, one rates it at Strong Buy, one says Buy and fully nine call it Hold.
Fair enough. After all, there is only 6% implied upside left to the Street's average price target of $66.91.
But Danel's compendium of thousands of other data inputs suggests the firm's fundamentals and sentiment should fuel further market-beating returns over the next 90 days or so.
Technicals rate a middling score of 5, but PFG scores a 9 for fundamentals and 8 for sentiment. And the stock has notched a perfect 10 Smart Score in four of the past five weeks.
UBS Global Research (Neutral) notes that a recent strategic review resulted in a $1.2 billion stock buyback authorization on top of the $675 million that remained under PFG's previous authorization. The company also is looking to sell certain business lines under its retail life and fixed annuities business.
Although there are a lot of moving parts in this case, it is possible for such initiatives to serve as catalysts for further upside in Principal's share price.
2. People's United Financial
- Market value: $7.3 billion
- Smart Score: 10
As noted above, M&T Bank is set to acquire fellow regional bank People's United Financial (PBCT, $17.21) in an all-stock transaction valued at $7.6 billion.
But that doesn't mean the easy money has automatically been made. That is, not if Danel Capital's algos are correct, anyway. The AI assessment sees the potential for further upside before the deal actually closes.
PBCT's perfect Smart Score rests on a 9 for fundamentals, a score of 5 for technicals and rating of 8 on sentiment. That said, PBCT has notched a perfect 10 Smart Score in seven of the past nine weeks.
The Street, however, has moved to the sidelines, pending the deal close. Their consensus recommendation stands as firmly at Hold as can be. Indeed, all 13 analysts covering PBCT tracked by S&P Global Market Intelligence rate shares at Hold.
PBCT is struggling with low interest rates, among other issues common to regional banks, analysts note.
"Lower yields on securities and elevated liquidity continue to weigh on net interest margin," writes CFRA Research analyst Pauline Bell (Hold). "Inline adjusted fees saw lower bank service charges, commercial lending fees and operating lease income, but could recover in the second half of 2021."
Among the highlights driving the bank's strong score for fundamentals are its cash per share and common dividends paid. That should come as no surprise to long-term dividend growth investors who know PBCT well as an equity income machine.
The regional financial services firm is a member of the S&P 500 Dividend Aristocrats – a list of stocks that have raised their payouts annually for at least 25 consecutive years. It remains to be seen if M&T Bank will take PBCT's place on the elite list of dividend payers following the deal's close.
1. Fifth Third Bancorp
- Market value: $26.7 billion
- Smart Score: 10
Fifth Third Bancorp (FITB, $38.09) is Danel Capital AI's top stock pick for outperformance over the next 90 days or so, and the Street likes the regional lender a lot, too.
Indeed, at Wedbush, analyst Peter Winter has FITB as one of his top picks when it comes to regional banks.
"Fifth Third Bancorp provided another positive mid-quarter update supporting our thesis that FITB is better positioned than peers with an improving revenue outlook, dry powder in the form of excess liquidity, lower than expected credit costs, and improving expense picture," says Winters, who rates shares at Outperform (Buy).
CFRA's Pauline Bell (Buy) is another fan, noting late last year that FITB was a great recovery pick for 2021.
"The 15th largest bank in the U.S. by assets, FITB maintains a strong presence in Midwest U.S and continues to gain market share through its strategy to grow middle-market commercial lending, deepen industry verticals, and expand further into the faster-growing Southeast," Bell wrote in a note to clients.
As a group, analysts' consensus recommendation stands at Buy. Nine analysts rate FITB at Strong Buy, five say Buy and seven call it a Hold.
Going back to what the AI algos see, Fifth Third scores a 9 for fundamentals, a 5 on technicals and gets a 7 for sentiment. The stock has notched a perfect Smart Score for three straight weeks and in five of the past seven.
Furthermore, FITB has scored a 9 or 10 on fundamentals for nine consecutive weeks. Technical readings have remained unchanged at 5 for four weeks, while sentiment lept from a low of 3 – notched in mid-June – to hit 7 for three weeks in a row.
Between what analysts and artificial intelligence say, Fifth Third would seem to be one of the most potential-packed stocks to watch on this list. Given that shares are already up about 40% for the year-to-date, if nothing else, FITB appears to have momentum on its side.