Can AI Beat the Market? 10 Stocks to Watch
An artificial intelligence 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 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 with 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.
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.
And, indeed, the top 5 rankings Danel Capital firm released in January and February beat the S&P 500 by considerable margins. The firm has since switched to issuing top 10 rankings.
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 10 stocks to watch over the next few months, as Danel Capital's AI platform gives them the highest probability of beating the market in that time. All have perfect Smart Scores of 10, but for good measure, we also took a look at some fundamentals, technicals and analyst research on these names.
Share prices and other data are courtesy of S&P Global Market Intelligence as of April 6, unless otherwise noted.
- Market value: $68.1 billion
- Smart score: 10
Cloud infrastructure unicorn Snowflake (SNOW, $236.01) generated considerable hype when it went public in September 2020 at $120 a share, making it the largest software offering in history.
It didn't hurt that Berkshire Hathaway (BRK.B) – whose chairman and CEO Warren Buffett is notoriously averse to initial public offerings – got in on Snowflake's ground floor, snapping up $250 million worth of SNOW in a private placement.
But mostly the excitement stemmed from Snowflake's growth prospects in the rapidly expanding industry of cloud infrastructure software. Known as a cloud-data warehousing company, Snowflake lets enterprise customers run their software on various cloud platforms, be they provided by Amazon.com (AMZN), Microsoft (MSFT) or Google parent Alphabet (GOOGL), to name just three.
Investors have already included Snowflake among their stocks to watch thanks to the shares' near-doubling since the IPO, but they're off about 16% for the year-to-date amid a widespread selloff in the software sector. By Danel Capital's reckoning, however, they're poised for a rebound soon.
The firm's proprietary AI assessment gives SNOW a Smart Score of 10, helped by strong – and rising – technical indicators and improving fundamental scores.
Wall Street likes SNOW's prospects, too.
"Snowflake's product architecture is superior to its rivals and that the market for cloud-hosted data analytics might be larger than investors believe," writes UBS Global Research analyst Karl Keirstead, who rates the stock at Buy.
Of the 26 analysts covering the stock tracked by S&P Global Market Intelligence, nine rate it at Strong Buy, two say Buy and 15 have it at Hold. Their average target price of $289.92 gives SNOW implied upside of about 25% over the next 12 months or so.
9. Palantir Technologies
- Market value: $42.4 billion
- Smart score: 10
Palantir Technologies (PLTR, $23.27) gets a perfect 10 Smart Score, again, thanks predominantly to strong technical grades. AI's assessments of PLTR's fundamentals and sentiment are more middling, but stable. Interestingly, Palantir's daily Smart Score has been in a strong uptrend recently, nearly doubling since the end of March.
Although a Smart Score of 10 suggests that shares in the big data analytics company are a good candidate for outperformance in the shorter to intermediate term, the Street is more cautious, at least in its longer term view.
Analysts' consensus recommendation on the name stands at Hold, according to S&P Global Market Intelligence. One analyst rates PLTR at Strong Buy, one says Buy, three have it at Hold, one calls it a Sell and two slap a Strong Sell on the stock.
Shares in the company, which went public on Sept. 30, 2020 through a direct listing, opened at $10 on their first day of trading and closed at $9.50. Although PLTR is up about 145% ever since, what stands foremost in investors' minds is that the stock is down 35% from its late-January all-time closing high.
William Blair equity research, which rates the stock at Underperform (the equivalent of Sell), is concerned that Palantir has struggled to deliver the same type of hyper-growth in its commercial division that many of its competitors have achieved.
"Palantir offers a unique solution, which has the potential to support growth rates in line with some of the most successful providers of enterprise software," writes William Blair analyst Kamil Mielczarek. "However, we believe there are several risks to achieving this growth rate that are not currently priced into the stock."
Analysts' average price target of $25.57 gives PLTR implied upside of roughly 10% over the next year or so. So, put Palantir among your stocks to watch over the next few months to see whether the more bullish algos, or more bearish humans, are right.
- Market value: $65.5 billion
- Smart score: 10
The Chinese electric-vehicle maker's stock has outperformed TSLA by a stunning margin over the past 52 weeks – and has done so in even more volatile fashion than we've come to expect from the leading EV stock.
Shares in NIO have gained more than 1,519% over the past year vs. an increase of 675% for TSLA. Of course, when comparing performance, it depends on how you draw the chart. For the year-to-date, for example, NIO is off 18% vs. a 2% drop in TSLA.
Either way, with a perfect Smart Score of 10, Danel Capital's AI expects NIO to return to its market-beating ways soon. Strong scores for technical and sentiment factors – and high marks for the fundamental factor of high expected revenue growth – all help propel NIO to the top of the AI list.
Investors certainly have to be pleased with some recent catalysts. Among them, NIO delivered a record number of vehicles in March. Most notably, the EV maker achieved the feat despite a global shortage of semiconductors that has forced other automakers to suspend or reduce production.
The Street is likewise bullish on the premium EV start-up company. Of the 18 analysts covering NIO tracked by S&P Global Market Intelligence, six rate the stock at Strong Buy, five say Buy and seven call it a Hold. Their consensus recommendation comes to Buy.
UBS Global Research analyst Paul Gong isn't quite so enthusiastic. He rates NIO at Neutral (Hold), citing risks such as weaker-than-expected demand; fierce competition, including the local production of Tesla; and a potential decline in government subsidies for the EV industry.
- Market value: $17.8 billion
- Smart score: 10
Albemarle's (ALB, $152.89) specialty chemicals products work entirely behind the scenes, from clean-fuel technologies to pharmaceuticals to fire safety. But what puts Albemarle among the market's top stocks to watch right now is lithium.
The world's need for higher-capacity rechargeable batteries was already insatiable. And now that electric vehicles have entered the scene? Forget about it.
That's why it makes perfect sense that Albemarle's top Smart Score is driven by a blemish-free rating of its fundamentals. Danel Capital's AI also assigns it a near-perfect score on the stock's technical considerations.
The algo's reading on sentiment, however, is relatively low, scoring only a three out of 10. That helps explain the Street's mixed view on the stock and its consensus recommendation of at Hold.
Although the accelerating pace of global EV sales bodes well for lithium demand, some analysts think ALB stock may have gotten ahead of itself at current levels.
"Our lithium outlook is improving, and we think ALB will be well positioned for growth through capacity expansions," writes CFRA Research analyst Richard Wolfe. "However, we think shares' lofty valuation captures much of this benefit, so we stay at Hold."
Danel Capital's AI suggests that ALB is a good current stock pick for tactical investors. But it also happens to be worth a closer look if you're a longer term dividend growth investor. Indeed, ALB is a member of the S&P Dividend Aristocrats, an elite list of S&P 500 companies that have raised their dividends for at least 25 consecutive years. Albemarle last hiked its payout in February 2021, by 1.3% to a quarterly 39 cents a share. The move represented the firm's 27th consecutive annual increase.
- Market value: $987.7 million
- Smart score: 10
Artificial intelligence – and its forerunner of quantitative analysis – in a sense puts blinders on. Data, not headlines, drives decisions. Whether that's the best approach to take with a company like Ebix (EBIX, $31.90) is a matter of debate.
Ebix, which specializes in software and services to the insurance, health care and financial industries, saw its shares tumble by more than 50% over two sessions in late February after its auditor resigned.
The whiff of accounting issues has yet to be resolved, but shares have clawed back some of their losses. EBIX is now off about 16% for the year-to-date and, by some measures, trading at bargain-basement levels.
Interestingly, EBIX scores high in all three categories of Danel Capital AI's Smart Score system, garnering sevens (out of 10) for fundamentals and sentiment, and an almost-perfect nine in technicals.
As for the fundamentals, the algo gives Ebix high marks for free cash flow, or money available to shareholders if the company decides to distribute it. And, indeed, the company generated free cash flow (after debt payments) of $59.5 million for the 12 months ended Sept. 30, 2020. That's a notable figure given that the company generated net income of $94.5 million over the same 12-month period.
Valuation is another plus – shares are trading at less than 10 times at estimated earnings for 2021.
While Danel Capital has EBIX among its stocks to watch right now, it's barely a blip on most analysts' radar. The lone pro covering the stock tracked by S&P Global Market Intelligence is likewise bullish, giving it a Strong Buy recommendation.
5. American Airlines
- Market value: $15.4 billion
- Smart score: 10
American Airlines (AAL, $24.06) – and indeed much of the rest of the air carrier industry – is considered by the Street to be among the ultimate recovery plays.
Danel Capital's algo certainly thinks so, giving it a perfect Smart Score with strength across the board. AAL gets a 10 for fundamentals and ratings of nine on both sentiment and technicals.
Notably, daily sentiment scores on the name have been in a steep uptrend since the end of March, while fundamental readings have remained perfect on a daily basis for even longer. Readings on technicals have likewise bounced higher in April.
The Street, however, is less sanguine on AAL, with a consensus recommendation of Sell. Of the 22 analysts covering the stock tracked by S&P Global Market Intelligence, two rate it at Strong Buy, eight say Hold, four call it a Sell and seven say Strong Sell. One has no opinion on the name.
Stifel equity research, which rates AAL at Hold, says it has reservations based on the company's ability to navigate a challenging post-pandemic landscape.
"American Airlines faces significant earnings pressure and uncertainty related to COVID-19, the pace of a recovery, and its ability to solve the margin challenges it faced pre-COVID," writes Stifel analyst Joseph DeNardi in a note to clients.
Argus Research also remains cautious on the stock.
"We are maintaining our Hold rating on AAL, which had been hurt by the 737 MAX groundings, is now wrestling with COVID-19 and high debt levels," writes analyst John Staszak. "With air travel demand remaining weak, we think that lower operating expenses and a low interest rate environment will provide only partial relief to American and other airlines."
4. Zoom Video Communications
- Market value: $96.9 billion
- Smart score: 10
Zoom Video Communications (ZM, $329.79) has been among the Street's top stocks to watch ever since the pandemic. Few companies have benefited from the work-from-home economy as much as Zoom – and Danel Capital's algos think there is more upside ahead.
The video conferencing company's perfect Smart Score is driven by high marks for technicals and sentiment, which offset a somewhat more middling rating in fundamentals.
The Street likes what it sees, too. Analysts consensus recommendation works out to a Buy, according to S&P Global Market Intelligence. The breakdown comes to eight Strong Buy recommendations, three Buys, 14 Hold calls, one Sell and one Strong Sell.
Although shares in Zoom are up about 170% over the past 52 weeks, they've been trending lower since October. And as for the year-to-date? ZM is off 2.2% vs. a gain of 6% for the tech-heavy Nasdaq Composite index.
An accelerating vaccination campaign against COVID-19 and the green shoots of a return to pre-pandemic routines doesn't necessarily bode well for ZM, but bulls say any pessimism over the stock's prospects is overdone.
William Blair equity research, for example, expects Zoom's momentum to continue in 2021 after posting "blowout" quarterly results to cap off an "incredible" year.
"We continue to believe that Zoom is benefiting from strong secular tailwinds in a large and underpenetrated market and expect that the company can continue to show strong growth for years to come," analyst Matt Stotler, who rates the stock at Outperform (Buy), writes in a client note.
With an average target price of $462.72, analysts give ZM stock implied upside of about 40% in the next 12 months or so. They expect the company to generate average annual EPS growth of 15.6% over the next three to five years, according to S&P Global Market Intelligence.
3. Bluebird Bio
- Market value: $2.0 billion
- Smart score: 10
Bluebird Bio (BLUE, $30.16), a biotechnology company that develops gene therapies for both severe genetic diseases and cancer, gets high ratings in all three of Danel Capital's major rating categories. It also gets high marks from the Street.
The algo gives it scores of seven, eight and seven for fundamentals, technicals, and sentiment, respectively. At the same time, the human consensus recommendation stands at Buy.
Complicating matters is that following a series of setbacks, the company in January said it will split into two separate entities, with one focusing on cancer and the other on rare diseases.
The problem, as Raymond James analyst Dane Leone puts it, is what is the value of Bluebird Bio with the split looming later this year? As a result, the analyst rates BLUE at Hold.
Another challenge stems from regulatory uncertainty surrounding the company's development of LentiGlobin. The Food and Drug Administration in February put trials of the gene therapy on clinical hold.
Although the consensus recommendation stands at Buy, analysts are pretty closely split on the name amid all the uncertainty. Of the 24 analysts covering BLUE tracked by S&P Global Market Intelligence, nine rate it at Strong Buy, one says Buy and 14 call it a Hold.
Their average target price of $47.89 gives BLUE implied upside of nearly 60% over the next 12 months or so. Keep in mind that the stock is off 30% so far in 2021.
As with Ebix above, Bluebird Bio appears to be one of the more speculative bets on the AI list.
- Market value: $3.5 billion
- Smart score: 10
The energy sector is loaded with recovery plays. TechnipFMC (FTI, $7.65), an oil and gas services company, could be one of the better ones, according to Danel Capital's AI.
FTI's perfect Smart Score is based on a rating of nine for fundamentals, and 10s for both technicals and sentiment.
The Street is mostly bullish too, with a consensus recommendation of Buy. Of the 25 analysts covering FTI tracked by S&P Global Market Intelligence, 11 call it a Strong Buy, two say Buy, 11 rate it at Hold and one has it at Sell. Their average price target of $10.89 gives the stock implied upside of about 40% in the next 12 months or so.
The slow reopening of the global economy is bullish for oil prices, and the market has been rewarding the sector handsomely. Indeed, energy has been the S&P 500's best-performing sector so far this year, with a gain of 29% through April 6.
FTI, down about 18% for the year-to-date, hasn't participated in the rally. But it's among Wall Street's best stocks to watch right now because the bulls – and the algos – say it's only a matter of time.
"In the Surface Technologies segment, we expect higher international activity to offset modest-to-lower North American activity in 2021," writes CFRA Research analyst Andrzej Tomczyk, who rates shares at Buy. "The Subsea segment should also see growth, given renewed operator confidence amid the improved macro environment and higher oil prices."
1. Alaska Air
- Market value: $9.2 billion
- Smart score: 10
Alaska Air (ALK, $73.74) is set to benefit disproportionately from a recovery in the air travel sector, analysts say. And Danel Capital AI's assessment suggests shares will take off soon.
ALK gets perfect scores of 10 on fundamentals, technicals and sentiment. With shares up nearly 42% for the year-to-date, it's fair to say the market and Danel's AI are of the same mind.
On the Street, analysts emphasize the air carrier's unusually strong fundamentals in an otherwise battered industry.
"We believe ALK's combination of a conservative balance sheet and its historically high cash generation per plane will make it among the first U.S. airlines to recover profitability this year," writes CFRA analyst Colin Scarola, who has a Buy recommendation on the stock. "ALK also has modest equipment purchase commitments for 2021-2022, in our view, with 2022 commitments equating to only 32% of 2019 operating cash flow."
At Stifel, analyst Joseph DeNardi, who rates ALK at Buy, believes the airline's geographic service area lowers the risk that it emerges from the pandemic facing significantly lower structural demand.
But Alaska Air also is among the best stocks to watch right now for its M&A potential. For example, what if the pandemic and its aftermath trigger a painful reckoning in the industry, leading to consolidation?
In that case, "Alaska would be a highly valued asset," DeNardi writes.
The bulk of the Street sides with the bulls on ALK, with nine Strong Buy calls, three Buys and two Hold recommendations. Add it all up and the consensus recommendation comes to Buy, according to S&P Global Market Intelligence.