A Note From Louis: InvestorPlace’s partners over at TradeSmith have been working on Project An-E, a powerful new AI tool to help investors make stock predictions. Earlier this month, at the AI Predictive Power Event, I sat down with TradeSmith CEO Keith Kaplan to talk about their exciting research. You can catch that here.
Thomas Yeung, a market analyst at InvestorPlace.com and manager of the Omnia Portfolio, took An-E out for a spin to see what it can do. And so, I invited Tom to share his findings here at Market 360.
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It turns out that AI is astonishingly good at picking stocks.
Several notable studies this year have used ChatGPT and other large language models to beat the market. Some have used sentiment analysis to process enormous amounts of news headlines for short-term trades. Others take a more deliberate, quantitative approach for portfolio construction.
Regardless of the method, artificial intelligence models work because of two truths:
- AI is particularly talented at detecting patterns.
- And the stock market is full of these patterns.
That makes these “neural networks” particularly powerful at producing winning investment ideas. History often repeats itself, and AI models excel at telling investors when they have seen something before.
Models such as TradeSmith’s powerful new AI tool, known as An-E, which helps investors make stock predictions.
I recently used it to find five top stocks that could double your money or more within a year with proper rebalancing.
Let’s see how it did…
1. Applied Digital (APLD)
Dallas-based Applied Digital Corporation (APLD) tops TradeSmith’s list of high-potential stocks.
Their AI system expects the stock will return 15% in a month, suggesting 400% upside within a year if the proceeds are reinvested at the same growth rate next month.
Applied Digital is a former Bitcoin (BTC) mining company that now owns and operates high-performance data centers. The firm changed its name from Applied Blockchain to Applied Digital in November 2022 to reflect the pivot and has since entirely dropped its crypto mining operations.
Shares of the company are up almost 400% this year
Analysts expect growth to accelerate. Applied Digital’s revenues are projected to hit $60 million this year and $300 million in 2024 as computing demand from AI and machine learning continue to rise.
Investors, of course, need to be careful. Applied Digital generates a significant portion of its revenues from crypto mining customers (even though it mines none itself). A sudden fall in Bitcoin prices will have knock-on effects to its share price.
2. Fastly (FSLY)
Fastly, Inc. (FSLY) is a content delivery network (CDN) that helps improve website performance by caching data and delivering content from nearby servers. When a user requests a website or application, Fastly determines which server is closest and sends data from that point.
When I checked about a week ago, TradeSmith’s system expected Fastly to rise another 6% within a month, topping off its 97% year-to-date gain.
A bottom-up analysis also paints a positive picture.
The San Francisco-based firm recorded a 122.7% dollar-based net expansion rate in 2022, even better than its 120.9% rate the previous year. This figure rises when existing customers increase their usage of Fastly’s platforms.
3. Mobileye (MBLY)
Shares of the Israeli self-driving firm Mobileye Global Inc. (MBLY) fell earlier this month after Intel Corporation (INTC) announced it was selling a $35 million stake in its former subsidiary. Many saw it as a vote of no-confidence.
Nevertheless, TradeSmith’s system sees this as a positive buying opportunity.
Mobileye shares are now expected to recover 6% over the next 30 days, a 101% annual growth rate. High-quality firms tend to rebound after selloffs, and TradeSmith’s AI believes the tech firm belongs in this category.
Moreover, Intel’s recent Mobileye sale likely has more to do with profit-taking rather than any fundamental issue.
Indeed, Intel might just need the money. The chipmaker also recently sold a fifth of its stake in a promising Austrian chip fabricator and is planning on spending billions through 2025 creating U.S.-based chip factories.
Mobileye also remains a top company among Wall Street analysts. Analysts expect revenues to rise 31% in 2024 and 40% in 2025 – an extremely unusual level of acceleration. Their target price of $47 also represents a significant 30% upside for this ordinarily low-volatility stock.
4. FiscalNote Holdings (NOTE)
FiscalNote Holdings, Inc. (NOTE) is an unusual pick for its relatively small market capitalization and negative price momentum. AI applications tend to pick more popular companies, especially those driven by sentiment analysis.
However, FiscalNote’s 8% expected upside this month has an unusual catalyst:
The company will join the Russell 3000 index at the end of this month.
In May, right here in Market 360, Louis noted that stocks can move 10% to 20% from the Russell Reconstitution alone.
The realignment… creates forced buying pressure under small-cap stocks in the days following the preliminary add/delete lists. And on the Russell Reconstitution day, the trading volume can be explosive…
The Russell Reconstitution could trigger an institutional stampede into the new stocks that are added to the Russell indices.
FiscalNote’s inclusion in the index will cause hundreds of funds to suddenly jump in on the illiquid stock.
The data analytics firm also has reasonable fundamentals, at least on a cash flow basis. Analysts expect revenues to grow 23% this year, and for operating cash flow to turn positive by 2024.
Beware, however, that the firm has an unusually generous compensation structure for insiders. Gross margins have also failed to keep up with growth, often a sign that a company is dropping prices to manufacture growth.
5. Cloudflare (NET)
Finally, investors seeking a safer route to AI riches should consider Cloudflare, Inc. (NET), the world’s largest provider of diversified content delivery network (CDN) services.
When I last checked, TradeSmith’s AI algorithm expected a 4.3% rise in a month, or a 68% annual rate of return. And an examination of Cloudflare’s business suggests this is entirely possible.
Cloudflare operates over 100 data centers and serves up a fifth of all websites in the world. The company’s DDoS protection services (distributed denial-of-service) benefits from network effects, making the firm a popular choice even among tech giants that can afford to host their own content. Walmart Inc. (WMT) and Dell Technologies Inc. (DELL) use Cloudflare to host their e-commerce sites.
Growth is also expected to continue at a rapid clip. Street estimates peg top-line growth at 30% through 2025, and for net income to rise roughly twice as fast.
That indicates Cloudflare’s stock will grow into its seemingly high valuations.
For those with shorter time frames, Cloudflare could also surprise to the upside over the short term. Analysts doubled their 2023 earnings per share estimates to 34 cents last April, and upward revisions are often a sign of short-term gains to come.
What Chess Teaches Us About Living with AI
Of course, not every AI algorithm can get stock-picking right.
Some studies have shown that ChatGPT’s “limitations in its explainability and stability” prevent it from making consistent predictions. And even the best quantitative methods often have trouble differentiating between companies to buy on the dip… and those going straight to zero.
But there’s a better way than entrusting all your money to an unpredictable robot.
Consider the evolution of chess and AI.
In 1997, IBM’s Deep Blue chess program stunned the world after beating then-world chess champion Garry Kasparov. For the first time, a machine had triumphed over the world’s top grandmaster.
But today’s top players aren’t machines or humans. They’re a combination of both.
Here’s Tina Huang, founder and chief technology officer of Transposit:
After chess-playing programs became widely available, the combination of humans and chess-playing programs performed better than either did individually.
In advanced chess, players use a program to explore the results of moves. Still, it is the human who controls the game. An advanced chess player marries human intuition with a computer’s ability to remember and calculate a staggering number of moves, countermoves and outcomes.
The strongest chess players are when humans and AI work together, with moves being tested by each. This eliminates programming bugs like the one Deep Blue suffered during its first encounter with Kasparov and identifies new patterns that ordinary humans cannot see.
And that is exactly why the research our partners at TradeSmith are doing is so revolutionary.
As Louis mentioned earlier, during the AI Predictive Power Event, he sat down with TradeSmith CEO Keith Kaplan to talk about Project An-E.
With Project An-E, Keith and his team didn’t chase the impossible dream of predicting the future or being right 100% of the time. What they did was look for an “edge” that they could exploit over and over again.
To learn more about Project An-E, click here to watch the replay of the AI Predictive Project Event.
Regards,
Thomas Yeung, CFA
Market Analyst, InvestorPlace.com
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Microsoft Corp. (MSFT) and Amazon.com, Inc. (AAPL)
