Finding and holding onto tomorrow’s AI winners is very challenging … a real-time example with C3.ai … how do you ignore huge AI price volatility? … a new AI pick from our experts
Artificial Intelligence is going to burn a lot of investors.
Yes, the technology is real, powerful, and every bit as transformative as the hype suggests. And yes, some stocks will ride this megatrend higher for gains of 10X, 50X, or even 100X.
But there’s so much AI “fool’s gold” out there that finding these monster winners won’t be as easy as we all hope.
Our macro expert, Eric Fry, editor of Investment Report, recently told his subscribers to get ready for the “Wild, Wild West of Artificial Intelligence.”
From Eric:
Artificial intelligence is not a specific, tangible product like a toaster.
It is a broad category of software-enabled processes that take on more shapes and forms than Proteus.
Because AI performs a wide variety of functions across a wide variety of industries, most of us ordinary investors cannot easily determine the value that any one form of AI contributes to a given company.
The AI initiatives at many companies are so early in their development that they are years away from generating significant profit growth.
Even worse, many of the “pure-play” AI companies are producing sizeable losses and will not become profitable any time soon.
For all of these reasons, most AI investments are simply “too hard.”
But AI investing gets even more challenging.
Let’s say you find tomorrow’s monster winner (even though there’s no way to be certain of that in real time). Are you going to be able to hold that position over the years despite inevitable gut-wrenching price declines, loud bearish investors, and various analysts predicting underperformance for the company’s operations?
A real-time example of the agony and ecstasy of AI investing
One of the recipients of the tsunami of investor capital into AI stocks this year has been C3.ai (AI). It’s an artificial intelligence and machine learning software company.
If you saw the writing on the wall and sunk money into C3.ai at the beginning of the year, you’d be up 243% as I write Friday morning.
But looking back, it was anything but a smooth joyride higher.
Let’s say you watched C3.ai’s meteoric 203% explosion from January 1 through April 3rd and decided to get in for your piece of the gains…
Well, a few days later, you’d be the proud owner of 48% losses.
Do you keep C3.ai in your portfolio at that point?
Let’s say you did.
As it appears today, that would seem to be a wise decision. C3.ai has gone go on to recoup its losses and then some. As I write on Friday, you’d be up 13% in your position.
But what now?
Earlier this week, legendary investor Louis Navellier and his team profiled C3.ai
From their analysis:
…Many argue that C3.ai’s big run up has more to do with the high enthusiasm about the rising adoption of generative AI and M/L technology, and less about the company’s fundamentals.
According to Fintel, 34.6% of C3.ai’s outstanding shares have been sold short. It makes sense that the short side of the trade with this stock has become crowded. Wall Street’s “smart money” is very skeptical about the company’s potential to capitalize on the aforementioned AI trend, and for good reason.
As seen from the company’s past fiscal performance, C3.ai (despite exposure to the AI and M/L trends) has experienced some growth challenges.
Louis’ analysis dives into those challenges but here’s part of his conclusion:
After a strong performance so far in 2023, AI shares could experience a sharp reversal. A move back down to $30, $20, even back to near $10 per share may not be out of the question.
…Tread carefully with AI stock today, but consider it as a possible speculative buy on any major weakness.
With this takeaway from one of the most respected analysts in our industry, are you holding C3.ai?
Perhaps. Before you answer, let’s add one more wrinkle.
Let’s say you were way ahead of the curve with Artificial Intelligence. Your research highlighted C3.ai as one of the best ways to play the megatrend back in February of 2021. So, you invested in the stock way before this year’s monster 200%+ explosion.
How much would you be up today thanks to your keen, early identification of C3.ai?
You’d be down 77%.
Even after C3.ai’s monster year so far here in 2023, you’re going to need almost 400% additional gains just to break even on your initial investment.
Would you still be holding C3.ai’s stock right now?
But this is hardly a bearish Digest about Artificial Intelligence
As we noted at the top of today’s issue, the AI megatrend is real and will transform our investment markets.
Despite Eric’s “Wild, Wild West” reference, he had a fun analogy for AI’s impact that older investors like me will enjoy:
Like Glenn Close in the 1980s thriller, Fatal Attraction, AI investments “will not be ignored.” They will demand our attention for years to come.
Our hypergrowth expert Luke Lango, editor of Innovation Investor, is equally bullish on the AI investment opportunity:
Investors who bet on the right AI stocks now – at the dawn of AI in the early 2020s – are giving themselves the chance to turn thousands into millions.
Investors who call this a bubble and buy safe utility stocks instead likely won’t make much (if any) money over the next decade.
So, on one hand, AI stocks will produce extraordinary wealth in the coming years. On the other hand, finding those AI winners is challenging to say the least, and even if we find them, holding onto them for years to come will likely require nerves of steel.
What’s the answer?
How to be a part of AI’s explosive future
Boiling it down, there are two things we need…
– Sleep-at-night position sizes
– Broad diversification
Let’s look at each.
We need risk mitigation strategies for every investment we own. Putting money into a stock without such a plan is like cracking the door open to emotion-based losses down the road.
One of the best risk mitigation strategies out there is a stop-loss (or a dynamic trailing stop-loss). This is simply a predefined market price at which you say, “the losses have gone far enough; I’m selling to protect what’s left of my gains (or capital).”
The problem is that a transformative technology like AI is likely to produce enormous volatility in stock prices as investors scramble to price in new information that could change at lightspeed.
So, even a wide stop-loss could trigger as tomorrow’s winning AI stocks experience massive selloffs after euphoric gains (C3.ai anyone?).
Because of this, perhaps a better risk mitigation strategy for AI investing (at least small-cap AI stocks that aren’t profitable yet) is to use a smaller position size. Specifically, invest only what you could afford to lose if the stock went all the way to $0.
This enables you to invest, then simply forget about it. In fact, that’s the best thing you can do – stop looking at the market price.
Now, before you become disheartened, wondering how you’ll grow wealthy with a humble starting investment amount, remember the Dot Com boom.
Just $1,000 invested in the following stocks at the beginning of the 1990s and held until the end of the decade would have snowballed into the following fortunes:
Micron – $38,648.40
Oracle – $46,029.60
Microsoft – $93,714.80
Qualcomm – $172,355.30
Cisco – $692,535.40
Next, spread your investment capital over a broad selection of sectors
What exactly is “AI investing”?
Is it the AI chat services such as ChatGPT and Bard, which means investing in Microsoft and Google?
Or is it the semiconductors powering these technologies? So, it’s more like AMD and Nvidia?
What about software companies like C3.ai and Adobe?
Or AI cybersecurity plays like Palo Alto Networks?
Here’s Eric with an AI play that’s not on the radar of 99% of Main Street investors:
Freeport-McMoRan Inc. (FCX) is the world’s largest copper miner. The terms “copper miner” and “artificial intelligence” do not obviously relate to one another. But in the case of Freeport, they do.
Freeport has been using a machine-learning model at its Bagdad copper mine in Arizona to boost production…
Because of the company’s success with AI at Bagdad, it is rolling out the technology across several other mines and expects to increase its annual copper production by a hefty 5% “with very little capital investment.” That’s an extra $800 million per year of “free earnings” for a company that earns about $3 billion per year.
With so many AI opportunities across this spectrum of sectors, where do you invest?
Everywhere.
At this point in the AI growth cycle, it’s about “shots on goal.”
Last week, Eric, Louis, and Luke sat down together to discuss the AI investment opportunity before us today
It was one of the most attended events in InvestorPlace history, with thousands of investors joining in to learn how our experts are positioning their subscribers for profits today.
Eric, Louis, and Luke also unveiled a brand-new AI focused portfolio of nine stocks they believe are poised for a huge run in the coming years as this technology shapes our world. I’ve seen the portfolio and it does span an array of sectors as we’ve just discussed.
Yesterday, our experts added a 10th stock to the portfolio. Here’s how Louis describes it:
By the numbers, there’s a lot to like about this recommendation…
Not only has this small-cap just turned a gross profit…
And not only has it surprised analysts who lowballed its sales growth for the last four quarters in a row…
It’s also getting the attention of Amazon, CBS, ESPN, and other big names who are clamoring to use its generative AI technology.
If you missed last week’s roundtable AI discussion between our experts, you can watch a free replay of it here.
Wrapping up, yes, there will be lots of AI fool’s gold stocks out there
But there will also be plenty of real AI gold, creating lifechanging wealth. Spread your investment capital across multiple sectors… use wise position sizing that enables you to ride out the volatility… and then just hang on.
Here’s Luke to take us out:
The AI Boom is here, and folks, it is just getting started.
Call it a bubble. Call it overrated. But it’s neither.
AI is the biggest technological paradigm shift since the internet. It is the real deal. It’s going to change the world. And AI stock investors will get filthy rich, while all others will spend the next decade playing catch-up.
Have a good evening,
Jeff Remsburg
