Hello, Reader.
It’s usually subpar food or slow service that will earn a restaurant negative reviews… not an AI-generated logo.
But that’s exactly what recently happened to a restaurant in my home state of California – The Salty Otter Sports Grill.
The Santa Cruz-based establishment received an overwhelming amount of one-star ratings last month after heated backlash against its surfing otter logo, made with the help of AI. (The owner pretty quickly replaced the logo with plain black text of the restaurant’s name.)
Source: SFGate
What we’re witnessing here is a shift in sentiment away from artificial intelligence.
Of course, AI’s role in our world is still important, and getting more important all the time. But the more that AI infiltrates our daily lives, the more we will crave uniquely human experiences.
And it’s not just local West Coast restaurant-goers who think so. Name-brand companies are beginning to understand the shift.
Aerie, the American Eagle Outfitters Inc. (AEO) clothing brand… cookware maker Le Creuset… and baby products marketer Coterie are distancing themselves from AI. All three companies issued disclaimers that their social media content isn’t and won’t be altered by the technology.
Coterie got right to the point…
The coming decade will still belong to data centers, algorithms, and robots. But in a future defined by AI, the greatest and most dependable returns may come from the companies that remind us of what AI can never reproduce:
The simple, sensory, irreplaceable pleasure of being human.
I call these businesses “AI Survivors.”
The shift away from tech at the height of its dominance is a profitable one that we’ve seen play out before. In today’s Smart Money, I’ll explain how I used this strategy in the dot-com era… and why I’m using it again today.
Then, I’ll show you how to add AI Survivors to your portfolio.
Let’s jump in…
I Diversified in the Dot-Com Bust – and Won
If you doubt that analog, non–AI stocks can deliver wealth-building gains, you would be mistaken. During certain market cycles, stocks like these are among the few that can deliver outsized gains.
For example, during the waning days of the dot-com boom, I was running an institutional research service in which I recommended selling short numerous high-flying tech stocks and buying several non-tech plays.
Generally speaking, both the “Sells” and the “Buys” performed as expected.
On the “Sell” side, I suggested dumping tech stocks like Softbank Group Corp. (SFTBY), Infosys Ltd. (INFY), Ariba Inc. (ARBA), Motorola Solutions Inc. (MSI), Cisco Systems Inc. (CSCO), and Celestica Inc. (CLS) – all of which tumbled more than 80% over the ensuing two years.
On the “Buy” side, I recommended a diverse group of non-tech stocks like…
- Royal Garden Resorts (MINT.BK) – A Thai hotel company
- Freeport-McMoRan Inc. (FCX) – A global copper and gold miner
- Humana Inc. (HUM) – A managed health care company
- Christian Dior SE (CHDRY) – A French fashion house
- The Indian Hotels Co. Ltd. (INDHOTEL.NS) – A leading Indian hotel company
- Adidas AG (ADDYY) – A leading brand of athletic shoes and leisurewear
As the chart below shows, these six stocks delivered triple-digit gains during the early years of the dot-com bust, while highfliers like Cisco, Amazon.com Inc. (AMZN),and Microsoft Corp. (MSFT) tumbled more than 50%.
I am not expecting history to repeat itself exactly during the current AI boom, but I do expect it to rhyme. Specifically, I expect many non-AI stocks to outperform their AI counterparts over the next few years.
Obviously, we do not want to ignore dynamic, promising AI plays. But while we remain alert to opportunities of that sort, we must also remain alert to opportunities that are unabashedly non-AI.
These opportunities have long-term resilience, even with current market volatility.
Doubling Down on AI Survivors
Several of the AI Survivor companies that I recommend would fall under the banner of “consumer discretionary.” That means they sell nonessential products to consumers, like luxury goods and pricey eats and drinks, which are typically the first casualties of a serious economic contraction.
Although the U.S. economy is not in a sharp collapse, it is experiencing a slowdown. And current geopolitical tensions, particularly in the Middle East, are creating volatility
To be sure, the Iranian conflict is a massive, and serious, risk factor – not just for AI Survivor stocks, but for the entire global economy. The longer these tensions last, the greater the economic fallout.
Thankfully, the U.S. and Iran agreed to a two-week ceasefire on Tuesday. Markets experienced a “relief rally,” but the ceasefire and recovery remain fragile. And turnaround plays, like AI Survivors, do not always turn around immediately.
Take Dutch Bros. (BROS), for example. The $7 lattes from this drive-thru coffee chain will certainly attract fewer eager buyers if the U.S. economy slips on a banana peel.
But any recent negative performance is not a major outlier. Although BROS (a recommendation at my Fry’s Investment Report service) has fallen somewhat more than the overall market year-to-date (YTD), most U.S. stocks have posted negative returns YTD.
For example, Tesla Inc. (TSLA), Microsoft Corp. (MSFT), and Oracle Corp. (ORCL) have all dropped more than 20% YTD, far exceeding the losses of my AI Survivor holding.
Nevertheless, I recommend staying the course with AI Survivor stocks like Dutch Bros.
The Oregon-based company has a phenomenal business model because it is even more capital-light than its rivals. As a drive-thru coffee shop, locations have no hot kitchens, no public bathrooms, and no inside seating areas. And each of its drive-thrus is a profit-spinning machine.
On the fundamental level, similar popular food service companies succeed simply because people like the product. People will drive for miles for the food. And don’t you dare criticize any of these popular restaurants in front of their fans.
I continue to believe that AI Survivors offer exceptional long-term opportunity – and have the strength to weather both AI and geopolitical volatility.
The Opportunity That Outlasts the Chaos
While none of us can predict what will happen next in the global landscape, we know that AI will continue to entrench itself in our everyday lives, even after the current conflict in the Middle East.
The current shift in AI sentiment may influence how the technology is used, but not if it’s used. Even as brands add disclaimers distancing themselves from AI in consumer-facing content, investment in AI remains constant.
What’s changing is how and where companies choose to apply it.
And how much we humans want to interact with it.
As AI becomes increasingly ubiquitous and invasive, we will crave interactions that exclude digital participation. Take it from The Salty Otter Sports Grill.
Tomorrow, I will be releasing my April monthly issue, where I’ll discuss other types of stocks with compelling risk-reward profiles well-positioned for volatility ahead. So, be sure to join me at Fry’s Investment Report ahead of its release.
Regards,
Eric Fry
