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Hello, Reader.
In his 1989 letter to Berkshire Hathaway shareholders, Warren Buffett penned one of the most famous investing quotes: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Buffett warns that buying a seemingly cheap business can be a poor investment if the underlying business is weak. But there’s another side to this coin:
Even a great business doesn’t automatically make its stock a great buy.
Today, this lesson applies to the AI boom. A company can be well-run and benefit from the technology’s powerful trend, but that doesn’t make it a good buy.
That’s because, across industries, AI-related spending is helping companies grow even while their traditional markets remain weak. The risk is that investors mistake AI-driven growth for strength across the entire business.
This is especially important for companies selling the infrastructure, equipment, and materials needed to build out AI. Their AI-related businesses may be booming, but other parts of their operations can still struggle. And if AI spending slows, that growth could prove less durable than investors expect.
That brings us to a surprising case study: a company whose stock has soared this year, thanks in part to the AI boom. On the surface, the story looks like a clear win. But look closer, and the picture gets more complicated.
I recently recommended selling this stock to my subscribers. The reasons why reveal a bigger risk hiding beneath the AI rally – and a lesson to keep in mind before buying other stocks riding the same wave.
In today’s Smart Money, let’s examine this company, and explore why strong growth doesn’t always make a stock worth buying.
Then, I’ll share where I see better opportunities instead.
A Great Stock to Sell
This story starts with copper.
The metal has rallied this year on expectations that building out AI infrastructure will require huge amounts of the commodity.
Back in January, I predicted that copper would top $7.50 this year. It came close to $6.85 in September, although it has ultimately fallen short of my prediction. Even so, Freeport-McMoRan Inc. (FCX), one of the world’s largest copper producers, has gained 29% so far this year – more than double the S&P 500’s 12.8%.
It might come as a surprise, then, that I recommended my Fry’s Investment Report subscribers sell the company last week. Freeport delivered a 430% gain for my subscribers who followed my initial recommendation back in January 2020.
But this wasn’t just about locking in profits.
The mining company’s rally raises an important question: How much more growth can investors reasonably expect? The answer starts with the same two words that helped launch this recommendation: artificial intelligence.
Back then, AI was a production story. Freeport had been testing a machine-learning model at its Bagdad mine in Arizona that promised to lift output by about 5%. Today, AI is a demand story, and the market trades FCX like a data-center stock.
On Freeport’s second-quarter conference call in July, for example, CEO Kathleen Quirk said customers reported robust order books tied to AI data centers and energy infrastructure. Together with better auto demand, she said, those orders were “more than offsetting weakness in private construction.”
In other words, AI demand has been covering for weakness elsewhere.
For now, AI demand is helping keep Freeport’s business strong. While that could seem like good news, the underlying risk is that Freeport isn’t benefiting from a broad-based surge in copper demand. The company’s growth depends more heavily on continued spending on AI and energy infrastructure. However, if that source of demand weakens, which recent trends suggest it might, the copper price could come under pressure.
Copper Demand Is Cooling
The first signs of cooling have already appeared. Copper has fallen 3.7% over the past month and now sits about 5% below its record. The supply picture has shifted, too. The International Copper Study Group forecast a 150,000-tonne deficit for 2026 last October, then reversed that to a 96,000-tonne surplus by April.
Meanwhile, Comex warehouses – storage facilities where copper and other metals are held for delivery through futures markets – hold a record-high 800,000 tonnes of copper. That massive stockpile is double what it was one year ago, and EIGHT times what the COMEX held two years ago! Those inventories could weigh heavily on prices if demand softens even a little. The financial group Macquarie warns a collapsing copper price is not out of the question.
Freeport’s profits are closely tied to copper prices. According to its CFO, every 10-cent change in copper prices affects the company’s annual earnings by about $390 million, or 4.4%. So, copper’s 34-cent drop from its record could reduce Freeport’s annual earnings by roughly 15% if prices stay at current levels.
Right now Freeport is a well-run company. But its future upside now depends largely on continued AI and infrastructure spending.
Avoid the AI Growth Trap
Bottom line: Beware of confusing AI-driven growth with lasting business strength.
Companies are spending billions on AI infrastructure, supporting demand for everything from copper and electrical equipment to chips and data-center hardware. But if AI-related spending slows, it could expose the weakness that strong demand has been masking.
That doesn’t mean you need to avoid every company benefiting from AI. It means looking beyond the AI boom for businesses with durable demand that can thrive even if AI spending cools.
That’s the kind of opportunity we’re looking for in Fry’s Investment Report. These companies include health care leaders, energy producers, and businesses serving everyday consumer needs.
They have one significant thing in common: growth drivers that extend beyond the AI boom.
To learn more about Fry’s Investment Report, click here. As a member, you’ll receive access to my latest research and reports.
Most importantly, I’ll help you identify “wonderful companies,” as Buffett calls them, trading at attractive prices – and recognize when it’s time to take your profits and move on.
Join me at Fry’s Investment Report today.
Regards,
Eric Fry
