If investors strictly watch the news for guidance, they are likely to commit mistakes. They design the content to elicit reactions from readers and viewers. Using emotion is the last thing we need while investing in markets. Sentiment has been overly negative and has hit equities hard, especially AI stocks.
This is in spite of constructive price action and an overabundance of tailwinds. Even this week, as the S&P 500 is making new records, the prevailing meme is to look for disasters. Skepticism is in full tilt even as the index made new all time highs hours ago.
When other people are nervous there are usually opportunities for cooler heads. Today we look at AI stocks for that. 2020 was the year of the SPAC, and 2021 is probably going to be the year of the ARK. Ark Investing caught the attention of people everywhere. They appear to have a new twist on the old Wall Street investment house formula. For example, they report on their activities daily. If nothing else, they earned kudos points from me on that transparency.
Their claim to fame was calling the opportunity in Tesla (NASDAQ:TSLA) and they were absolutely right. I was one of the skeptics and I learned my lesson. I mention them now because today’s stocks fit the theme they like. Invest in future trends now so AI stocks are ripe for the picking. Only one of the three is actually in their portfolio, but the concept is what matters.
ARK’s methods are not traditional so I caution against following them with an entire portfolio. These are speculative bets on future successes. Don’t take my word for it, read it on the front page of their website in giant bold letters. I do like my choices to varying degrees (more on that later). But I remain cautious so I won’t bet the proverbial farm on them.
In two of the cases, the stocks have fallen out of favor for no good reason. Meaning the sellers are making a mistake in the long term. Therein lies the opportunity to buy them while they’re cold. The Wall Street pendulum swings too far in both directions. Soon enough investors will remember they still like these and hopefully re-buy them. Warren Buffett suggests it’s good to buy while others are afraid.
Today’s three AI stocks are:
AI Stocks: Palantir (PLTR)
Palantir already has a successful business with an annual revenue run rate over $1 billion. This is not the typical SPAC EV company with no sales. They already have successful segments serving the private sector and government. In layman’s terms, their products empower companies to utilize data.
We’ve gotten really good at digitizing everything. The challenge is to put those mountains of information to use efficiently. Integrating different systems within one company is difficult. This is why Palantir’s services are attractive. The interfaces are intuitive so client employees are able to make better decisions on the fly. I know from personal experience having managed several operations, this is a constant struggle.
Collecting data from different departments and locations is critical. Using them is the end result, and that’s where Palantir excels. Management has gained investor trust as they represent their teams well. Watch any of their presentations and you too will understand why. They have a simple story to tell and it’s intuitive.
The digital revolution process went into hyper-gear last year. We will need artificial intelligence to manage this deluge of information. The progress of using machines to help us make better decisions is going to evolve. PLTR is on the ground floor and rising quickly. They will be either setting these trends, or adjusting into tides as they shift.
Long term, this is a stock to hold. Short term, the bulls need to get back above $25 per share. From there they can chip away at the resistance that now lies above $30. The messy spike from the GameStop (NYSE:GME) debacle is now over, but that giant mountain is resistance on the chart. It is not a game changer, but it’s a hurdle PLTR stock will need to overcome in the coming months.
My second pick today is a no-brainer choice because the company name has AI in it. Similar to PLTR, the current metrics don’t tell a successful story yet. The price premium is almost entirely on credit for future performance. In this case, the business is still in its infancy stage and far from spectacular. Think of it as buying a property while crews are just started breaking ground. You meet the developer, they share their idea and plans so you buy on faith the can execute.
AI’s management is an important reason to own it. Onus is on them to live up to those expectations. This team has history because we know Thomas Siebel from his prior successes at Oracle (NYSE:ORCL) and Siebel Systems. He’s done it twice so I can reasonably assume he can three-peat performance.
More importantly, I don’t like to chase runaway stocks, especially new ones. In this case, a lot of the froth fell out of the AI stock already. It collapsed early February and out of nowhere. From high to low it has corrected 65% and hasn’t stabilized yet. Buying into it means catching a machete with a tiny handle and a giant blade. It’s going to be tricky.
AI stock is still 64% off its all-time highs. The fall from grace was very dramatic. They tried to hold around $120 and $90 but both efforts failed. This is their third real attempt at stabilization. The opportunity is definitely not a sure thing so I would not go all in.
The stock price may have lost enough weight for it to develop support this time. Investors should look for no new lows first. Then slowly-but-surely consolidate to challenge the descending trend of lower highs. On top of the fact that this, too, is a speculative bet on future successes, there is capitulation risk. For that reason, investors should leave room to manage if the situations remains fluid. Alternatively, traders should stop out if it sets yet another new low.
Between the first two I already mentioned, I favor PLTR. This is indeed an either-or situation. I don’t like taking the same speculative risk twice and at the same time.
International Business Machines (IBM)
My third pick today may surprise people who know me. I have been a critic of IBM management for years. I am including it in my write-up today but not for the reasons you think. Before the year started, I picked IBM to be a surprise comeback kid for 2021. This was against my instinct that the new management is the same disappointment as the old one.
Since then, the stock delivered a lot of upside. From here my conviction is smaller because of that. However, there is another opportunity lurking.
IBM stock has been in a descending channel for years. It is now back at the upper ends of that. This opens the door for a technical breakout. The bulls can finally free it from the long negative trend. If IBM stock can rise above $137 per share, it could fuel another burst of buying. The end result could be the resumption of the breakout.
Realistically, and if the general markets are favorable, IBM could reach $160 per share. It won’t be easy, so this will be my least favorite of the three. Also, this is more of a chart setup than an investment in the company’s prospects. I consider this a trade, so it doesn’t have to be mutually exclusive from either of the other two. This means that an investor could choose to invest in PLTR’s future. At the same time, take a trade betting on the IBM price action.
For any of these three ideas to be fruitful, the overall rhetoric has to change. Of the stock market drivers, the only variable now is sentiment. The government has plenty of money floating around in the system. All we need is for an abatement of headlines so that earnings results drive the price action.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.