AI Stocks Are on Sale. It Won’t Last
Summary
Brian argues that the stock market is currently facing a 'tug of war' between the downward pressure of high interest rates and the upward momentum of surging corporate earnings. Brian states that while the S&P 500 appears stable, underlying sectors like semiconductor stocks have seen significant corrections. Brian believes this disconnect represents a 'coiled spring' where stock prices have dropped even as their earnings potential has increased, particularly among AI infrastructure companies. Brian explains that the 'gravity' of high interest rates only wins when earnings growth actually turns negative, which Brian notes is not yet happening for high-quality firms.
To navigate this environment, Brian uses a specific filter to identify opportunities: companies must have at least 15% projected earnings growth for next year, and analysts must have raised their forecasts since July. Brian emphasizes a cautious investment strategy, suggesting that investors wait for companies to release their upcoming quarterly reports before initiating or expanding positions. Brian also advocates for using dollar-cost averaging and keeping position sizes small for high-volatility stocks to manage the inherent risks of the current macroeconomic climate.
Mentioned Stocks
Reasoning: Brian emphasizes the company's $14 billion backlog and its focus on the booming data center construction market. Brian notes that Comfort Systems has beaten Wall Street estimates for four consecutive quarters. Brian states that although it trades at a slight premium, it remains a buy on Brian's system, especially as the stock pulls back toward its 200-day average.
Reasoning: Brian mentions owning Nvidia and notes its central role as the 'engine' of AI data centers. Brian uses it as a benchmark for the industry's health but does not focus on it as one of the five specific filter stocks for this video.
Reasoning: Brian highlights the strong demand for AI data center cooling and the company's 60% EPS growth. Brian states that although the stock has dropped 31% since July, analyst forecasts are rising, leading to a 'Buy a Lot' signal on Brian's system. Brian recommends waiting for the October 28 earnings report before using dollar-cost averaging.
Reasoning: Brian observes that Onto Innovation has a record $1 billion backlog and projected growth of 44% for next year, resulting in an attractive PEG ratio of 0.6. Brian mentions that despite the stock falling below Brian's signal ladder, the fundamentals remain solid. Brian advises keeping positions small due to volatility and waiting for the November earnings report.
Reasoning: Brian identifies Innodata as a high-risk, high-reward play in AI model training with 58% revenue growth. Brian argues that its neutrality as a third-party trainer is a key advantage. However, Brian warns of extreme volatility and customer concentration, suggesting that investors only use the 'riskiest part' of their capital and wait for the November report.
Reasoning: Brian points to nVent's 53% revenue growth and the fact that analysts have raised profit forecasts by 14% since July while the stock price fell. Brian notes that while there is competition and debt risk, the stock is approaching its 200-day average. Brian suggests starting with a small position after the upcoming earnings report.