If the stock market artificial intelligence winner is in the police lineup, it is not difficult to identify a regular suspect.
AI chip designer Nvidia jumps out. You also play Data Center Operator and machine learning infrastructures such as Microsoft, Amazon.com and Alphabet. Oracle and Salesforce, software providers that offer AI-powered features, also stand out.
problem? They are being analyzed by Wall Street. And everyone knows their name to borrow from the cheer theme song on the TV sitcom.
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“The cast of this character is very well understood,” says Andrew Choi, manager of the Parnassus Core Select Exchange-Traded Fund.
However, the new group of AI stocks does not fit the typical profile and is flying under the radar. It is possible to invest in the digital revolution amplified by artificial intelligence through less-than-clear companies, such as so-called employers and AI automation beneficiaries.
“We are pleased to announce that we are committed to providing a range of services to our customers,” said Robert Ruggiello, Chief Investment Officer at Brave Eagle Wealth Management.
A good example is the Language-Learning platform Duolingo (Duol, $390). This helps you learn up to 40 languages by having interactive, real-time chats with Lily using AI-powered chatbots and app-friendly teenage characters.
Or Trane Technologies (TT, $383), a HVAC system manufacturer that uses AI to identify performance issues, better predict service needs and energy usage, and help systems function more efficiently. (The price is April 30th. The recommended name is bold.)
AI is at its heart, a business productivity enhancer. A study by consulting firm Accenture shows that it has 2.4x improvements in generator AI (the type of artificial intelligence that allows machines to naturally respond to human conversations) to an average revenue growth rate of 2.4x.
However, exposure to stocks that benefit from AI use is difficult.
There are many mutual funds and ETFs with “AI” or “artificial intelligence” in the name, but they mainly invest in high-tech companies focusing on the infrastructure build-out phase of this technology, including semiconductor manufacturers, cloud computing, data center stocks, and software companies’ creation codes.
Challenging adolescence
Also, AI is still in the adolescence stage (only 16% of organizations in 2024 do not have a pure play fund focused on AI productivity investment themes.
“There really is no portfolio specific to that theme,” says Brian Armour, director of passive strategy studies in North America at fund tracker Morningstar.
Also, the AI industry, which is still adopted, makes it difficult to accurately quantify the benefits of efficiency and the origin of cost-reducing companies.
According to analysts, AI can be transformative in some areas, but offers progressive benefits in others.
Therefore, investors must do their own detective work to ferret so-called AI 2.0 companies, or companies that will benefit most from AI-driven productivity improvements and product breakthroughs.
A good starting point is to identify technology companies in sectors and industry that can benefit from large-scale cost savings from AI automation-driven cost savings, or to increase innovation in products that use machine learning to drive sales.
You’ll want to stay at home at a company that will increase productivity and profitability with the help of AI-driven efficiency and cost-cutting.
Just as Wall Street looks at the same store sales and assesses the true strength of the retailer or the customer acquisition of cues about the growth of the streaming service, investors who want to identify AI winners can measure progress by analyzing key metrics that measure increased efficiency. One gauge to focus on is revenue per employee.
“The positive impact of AI is that revenue per employee needs to increase over time,” said Ulrike Hoffmann-Burchardi, Chief Investment Director, Global Equities, UBS Financial Services.
AI can increase efficiency by increasing worker production or reducing costs through staff cuts (particularly companies that rely on human workers who perform repetitive manual tasks).
The second data point to monitor is profit margin. “AI should help drive margin expansion,” says Jeremiah Buckley, portfolio manager at Janus Henderson Investors. This means that a larger percentage of each dollar sold is maintained as a profit.
Other important measures to track are employment personnel and costs (are they falling?). Customer service efficiency (reducing phone, online, or chat wait times?); and, of course, sales (are they increasing?).
“AI is another compelling basis to consider when choosing a stock,” says Choi of Parnassus Funds.
Beyond the magnificent Seven
According to investors at Janus Henderson, AI-driven productivity is the next long-term propellant for stock prices, as the internet was 25 years ago, and technology is seen as pervasive in all sectors, industry groups and businesses.
Therefore, one investment approach is simply to buy a wide range of low-cost index funds. For a different approach, Ed Yaldeni, president of Yaldeni Research, promotes “S&P 493.” This is a reference to S&P 500 Index stocks other than Magnificent Seven as “big beneficiaries” of the expected AI productivity boom.
These 493 large cap exposures are available through the Defiance Large Cap Ex-Mag 7 (XMAG, $20), a $32 million ETF that just opened in October. Therefore, there is not enough track record to recommend it. The fund tracks an index of all S&P 500 shares except the grand seven.
Certain sectors stand out in searches for winners in AI 2.0. The following three things become zero.
Perfect for finance
One place to look for AI adapters with potential upwards is your local bank. Here, many of the tasks and client transactions that once human-performed are handled by AI-powered tools such as chatbots and virtual assistants.
This allows employees to focus more time on products and customer touchpoints that drive revenue. Large banks are poised to benefit from tens of millions of customers, daily customer service interactions, piles of personal and financial account data, and scams, and profit from large machine-driven efficiency.
“Large banks” say Yadeni is “most likely to increase Backpervart’s productivity.”
For example, Erica, an AI-led virtual financial assistant created by Bank of America (BAC, $40), has interacted with customers more than 2.5 billion times since its launch in 2018. Last year, it helped 2 million customers a day, the bank says.
At JPMorgan Chase (JPM, $245), the country’s largest bank, most employees have access to large-scale language modeling tools that can use generated AI to interact with customers and assist with a variety of work tasks.
JPMorgan also adds generation AI to its call centers to help agents answer questions about car loans, mortgages, credit cards and deposit accounts more quickly. AI also helps in detecting fraud that minimizes writes due to theft-related losses.
“JP Morgan is out the day before,” says Lugirero of Brave Eagle.
Investors who bet that AI will boost the US banking industry significantly may consider the Investco KBW Bank ETF (KBWB, $61), which invests in two dozen banks and boasts a 2.9% yield.
Insurance, a data processing intensive business, is another beneficiary of AI. Property and casualty insurance companies such as Allstate (All, $198) and Progressive (PGR, $282) are using AI to enhance underwriting and claim processing, improve weather-related risk assessments, and improve pricing strategies.
For example, handling of car billing on a total home damaged by a highway or hurricane can largely be done using AI tools.
“Many of this work is becoming more and more digital,” says Choi.
Modernization industry
Efficiency, accuracy and cost savings are characteristic of industrial operations, and AI can do what the assembly line did for AUTOS a century ago for the manufacturing company.
Machine learning is already affecting product design, predictive monitoring technology, energy and operational efficiency, and cost reductions through automation and advanced robotics.
Quent Capital founder Gregg Fisher is bullish on Germany-based tank maker Rheinmetall (Rnmby, $339). This provides an AI-supported navigation system that allows tanks to autonomously manipulate complex terrain, reducing the need to place human operators in dangerous wartime situations. The system can be installed on existing tanks and new tanks.
“The war in Ukraine and what’s going on in Europe, the Middle East and other parts of the world (Rheinmetall) can’t keep up with the orders they’re getting,” says Fischer.
Another industrial inventory with AI chops is Axon Enterprise (Axon, $613), a maker of non-lethal Taser stun guns and a suite of AI-enhanced public safety tools, said Bryan Wong, manager of the Osterweis Opportunity Fund. Axon’s AI tools can automatically generate police reports that can eat up 40% of police day.
The technology creates license plates for vehicles travelling 140 mph in three lanes in order to search for suspects in minutes, and allows you to scan license plates for vehicles travelling 140 mph to search for suspects.
“Think about the cost of executive time,” Wong says. “If we save an hour, we can redeploy officers towards the police.”
Axon is the market leader in body-worn cameras, according to market research firm Mordor Intelligence. Still, Axon’s growth runway is long, with law enforcement market penetration being under 15%.
Agriculture Heavy Machine Maker Deer (DE, $464) uses AI for precision agriculture, using machine vision to distinguish weeds from crops.
“This See & Spray System sprays weeds only with herbicides,” says Ruggiello.
Healthcare prescription
AI can speed up drug development by pharmaceutical companies and biotech companies, potentially benefiting health insurers such as the CIGNA Group (CI, $340) (thinking to automate claim processing and improve customer service). The technology can also assist physicians in data-driven health decisions and detection of previous diseases.
Intuitive Surgery (ISRG, $516) uses AI technology in surgical robotic systems. Using an intuitive database of over 10 million procedures best known for minimal invasive procedures, it provides insights that can help assess surgeon risk factors and predict potential complications, not to mention improving patient outcomes.
“We can learn a lot from that vast collection of data,” says Choi.
As for AI, early adopters should watch. As AI deployments mature, says Jay Jacobs, head of themes and funds trading on active exchanges at Money Management company BlackRock.
Now, “It’s about companies that are about to be more late on who will adopt it early and use it effectively,” he says.
Note: This item was originally featured in Kiplinger Personal Finance Magazine. Subscribe to help you make more money and make more money here.
