3 well-positioned AI stocks from Steven Cress

0:09We are back with Steve Cress, our head of quant at Seeking Alpha. Always a great pleasure to have you on the podcast. Thanks for coming back on Investing Experts, Steve. Greena, thank you so much for having me. It's always a pleasure to be here. Truly appreciate it. Thank you. Our audience truly appreciates it. I truly appreciate it. I find them personally edifying. I know the investors find your previous appearances super, super informative and helpful. You've recently been on talking three growth stocks, three income stocks. That's what you were talking about recently. Before that, you updated us from the ProQuant Portfolio and AlphaPix.

0:47What will you be giving the people today, Steve? Well, today I want to actually go back to the three AI stocks because November was a crazy month. And rightly so. During our last presentation, it was basically to have this barbell approach where we focused on three income stocks and three growth stocks. And sure enough, there definitely was volatility during the month of November. But so crazy that the market started off strong, then it sold off, and then it started coming back. So you're really well-positioned to be in both places, taking advantage of the dip and getting some decent yields on those three income stocks, because those prices have since appreciated.

1:32So, the yields are not great as high as they were. And with our three AI stocks, the AI stocks have started to come back. The technology arena and sector are moving. But these stocks, we still think are really strong in terms of their fundamentals, not overvalued. And that's why we think they're really well positioned. So I think before we jump into it, I know this is one of your favorite parts of every presentation. Yeah, people are going to be really excited. It's disclaimer time, everybody's favorite time. I'm going to read a disclaimer really quickly, and then we're going to get to the heart of the matter.

2:04We are not advising you personally concerning the nature, potential, value, or suitability of any particular security. You alone are solely responsible for determining whether any investment security strategy or any product or service is appropriate or suitable for you based on your investment objectives and personal and financial situation. This presentation is for information purposes only. Content is presented as of the date published or indicated and may be superseded by future events. It represents Steve's opinions, which may not reflect the views of Seeking Alpha as a whole. Past performance is no guarantee of future results.

2:37Seeking Alpha is not a licensed securities dealer, broker, U.S. investment advisor, or investment bank. But Steve Kress is a very smart and capable and articulate man. So let's get into it. Steve, if you want to just give a brief overview of what Quant is bringing to the table, and then we can get into it. Sure. And for those who are new, I'll just give a brief background on my almost 35 years in the investment industry. The majority of my career was spent at Morgan Stanley, where I worked for 13 years. I ran a proprietary trading desk in quantitative strategies. I also was the head of international at Northern Trust for investments.

3:15And I was the founder of a quant hedge fund, as well as a fintech company that was purchased by Seeking Alpha. And that is what brought me here today. And it's been a great journey. Today in our presentation, we're going to cover why quant, pullbacks and rallies, and marker rotation, the case for our AI growth stocks, which we will be focusing on today. So how do we achieve our results? What is a quant system? Well, a quant system uses data, math, and algorithms to identify investment opportunities. Now, that sounds pretty fancy, but at the end of the day, we really do what any investment analyst does that works at Morgan Stanley or Merrill Lynch or Goldman Sachs.

3:57We use fundamental analysis in our quant system. And in fact, I refer to it as GARP, which is a very common investment approach. It's called growth at a reasonable price. So our quant system has an element of diversification in terms of the styles that it looks at, where we're looking for value, growth, profitability, momentum, and positive analyst revisions, which is very similar to what many analysts do. I will say there are quant models that just focus on momentum. There are some that just focus on growth. The same way an investment manager could just focus on value, you could pick a particular style, but we pick a diverse approach because inherently, I believe that diversification will maximize your returns and minimize your risk over a period of time.

4:42So, we employ basically this fundamental strategy that uses GARP. However, what makes it quanti is the power of computer processing. So, any individual analyst, when they cover a set of companies, their bandwidth is maybe to cover 15 or 20 stocks overall. Because of the power of computer processing, we can cover about 5 ,000 stocks, and we can actually provide a fresh directional recommendation every day. So, imagine an analyst just updating their research every single day. That doesn't really happen. It takes some time to update their research reports. And once they issue a report, it could be another month or two before they write another report on it.

5:24With our quant system, basically every day we go over every company's income statement, cash flow statement, balance sheet, and hundreds of financial metrics. And we score it all on a relative basis. And by scoring it on a relative basis, we could look at a company versus its sector and help identify the strong companies from the weak companies. So that is sort of the quant aspect. It is that power of computer processing, but we do it with the underlying investment approach being fundamentals. And we have a good track record too. Over a five-year period, this actually is not a back test. This is a simulated trades.

5:59It's been in existence here at Seeking Alpha since this time. What we do here is we take all our quant strong buys. So, on any given day, there could be 350 to 400 strong buys. And we refresh the portfolio. If a stock is no longer a strong buy, it comes out of the portfolio. If it comes back to strong buy, it goes back in. And we do the same with our measurement with Wall Street analysts. and then as a benchmark, we use the S &P 500. And you can see over a five-year period, the Seeking Alpha quant system is up 227 % for its strong buys versus Wall Street strong buys up only 33 % and the S &P 500 up 66 % for the same period.

6:36So you can see we have a really good track record using our quantitative approach. I just want to say for people's edification, for those listening, you can find that at seekingalpha.com slash performance slash quant to see for yourself the great performance that quant has had. Thank you so much. Appreciate it. Yeah. So a little bit about the market pullback and rally. So this is very short term oriented because as many investors were aware, the beginning of the year was actually quite tough. The market did have a big correction and then all hats were off and the rally came. And really up until the October period, We were seeing new highs with the S &P 500 and the NASDAQ.

7:18Get into November, in the beginning, it looked good. And then it took a nosedive. Really, up until October, we had a great rally from April. Of course, we had a major hiccup here as the tariffs were introduced. Then we were off to the races, get to October. Then when you look at the one-month view, you could see where the market started and basically had a little correction, started to come back up. But the correction basically lost confidence, and it started plummeting down. So, it's been a crazy November. And then we got to the point where the market really sort of discounted what was happening with the Fed, with interest rates, the possibility that they could be stagnant, that there could be no change, and then the possibility that there still might be a change because of labor data.

8:09So, the market really sort of discounted everything in. I was also very fearful during this period that AI and technology stocks were overvalued. They came down, investors felt comfortable with it, and right around November 21st, the market started to pick up steam again to our current level, where we're at about 682 right now from a low of about 652 just a little over two weeks ago. So, just as a recap, market started fairly strong, started to lose faith of investors, last push to get it back up, and then totally investors just got really scared of the AI bubble, what was going to happen with interest rates.

8:51And we took not quite a nosedive, but a pretty hard fall from 683 all the way down to about 652. And here we are back up at 682 now. So, the market has basically discounted the concerns, felt a lot of the AI and technology stocks were oversold, and it has come right back. Interesting enough, volatility has really started to spike again. And obviously, with a lot of the concerns I just mentioned, with the government shutdown, with AI stocks being overbought, market came off and volatility really had spiked and the performance of each sector. So, I have this sorted by the five-day performance. The mega cap tech stocks that previously led the rally had really sold off.

9:38And the way we can look at that is if you look at the one-month, you can see the one-month data point shows technology down 4.77%, and it had been leading. And then if we go to the bottom, you can see the healthcare stocks were the best-performing stock over the last four weeks. And if we look at consumer staples, you can see that was the second-best-performing sector. However, that's over the course of the month. And now that we've had the rally back, you can see the sectors that were stronger over the month, the safe havens, are now showing lower performance. And now we have technology has been doing well for the last five days.

10:18We have the energy sector has really picked up over the last five days, up 2.28%. And we can see our utilities and healthcare sector are down over the last five days. So giving up some of that momentum that they had built. and interest rate traders who were really fearful that there might be only a 50 % chance of a cut today, 90 % of traders expect a rate cut in December. And if you looked at this a couple weeks ago, it was at 50-50. And if you looked at it from November 6th, you could see that 70 % of the traders expected a cut. So it went from 70 % of traders to about 50 % of traders. And now 90 % of traders expect a cut.

10:56So it is just all over the place. The market is incredibly uncertain and professional interest rate traders. November 6th, 70 % of them expecting a cut. Then like a week ago, it was 50-50. And now today, 90 % of the traders are expecting a cut. Two weeks ago, the market had sold off to a point where the CNN fear and greed index was an extreme fear. And I think it was right around that time that I presented, Rina. And I said, for me, historically, the longer you say an extreme fear, typically the better buying opportunity it is. because the name of the game at the end of the day is buy low, sell high.

11:33And markets tend to go a lot lower when you're in extreme fear. So that's the time you really want to be buying. So we've actually moved up. Today, you could see a CNN score of 24. So even though we're still in extreme fear, you could see we're coming off the bottom. So it's showing that the market is starting to feel a little bit more comfortable. And certainly, the last couple of days, we've seen the market trading better. So without further ado, let's go into our first stock. Micron Technology, ticker symbol NU. Market cap on it is around$271 billion. This is a quant strong buy. In information technology, it ranks 1 out of 538 stocks.

12:12And within the semiconductors industry, it ranks 1 out of 67. It is the only U.S.-based manufacturer of advanced memory chips with leading-edge technologies. Many of you are probably familiar with it because it is a really big company. and I'm actually going to take us right onto the platform. So what I want to highlight here is you could see this stock actually really started to sell off before many more and it came down much harder. And I'm so pleased that we recommended it with our barbell strategy right around that time. So you could see the stock has done well, but I still expected to do continue to trade well.

12:50And if you look at the, on the right-hand side, you'll see there is a quant strong buy and below that you'll see the factor grades. Remember, these grades are all relative to the sector. So when you see a valuation for B, that means it's very attractive compared to the sector. But despite the run-up in the stock since mid-November, the valuation is the same that it was three months ago. But more importantly, if you look at where it was six months ago, it was a D minus. So it was actually considered fairly overvalued at that point. And now it's far more attractive in terms of its valuation framework.

13:25We'll click into valuation. You can see some of the grades. And here you can see, this is, you know, you typically don't see this for an IT stock, but the 4P on this is 15 times versus the sector at 30 times, a 50 % discount to the sector on a PE basis, hence why the stock has such a great overall valuation grade. The PEG, which is a combination of growth and PE, is an A-plus at 0.03 versus the sector at 0.93. So it's at a 96 % discount to the sector. So valuation framework looks incredible. If we click on growth, looks like almost a straight A report card here. If you're looking at revenue growth, forward revenue growth is 36 % versus the sector at almost 8%.

14:11If you look at EPS growth on a forward basis, it's got 191 % growth rate versus the sector at 10%. So really like in Micron technology, they're also extremely profitable. If I click on the profitability grades, you can see the return on equity is 17%. So it gets an A - versus a sector at 6%. So the point of these letter grades is to really give you an instant characterization of where it compares to the sector. So you don't even have to really look at the data. You just know by looking at the grade that it's strong on profitability or the underlying metric return on equity is much stronger than the group, but we're also very transparent.

14:50So we provide the actual data point as well. So for Micron technology, if I go to the analyst revisions grade, we will see in the last 90 days, 29 analysts have actually moved their estimates up and zero have moved it down. And that's for the full year estimate. For the quarter, 24 analysts have moved their earnings estimates up and no analysts have moved their earnings estimates down. So analysts showing that they're really confident that this company will continue to do well and putting their money where their mouth is by upgrading the earnings estimates for the company. Okay, so that was Micron Technology.

15:31Our number two stock is Comscope Holding, ticker symbol C-O-M-M. This is much smaller. This would be considered a mid-cap company with a market cap of about$3.66 billion. This is also an IT stock. It ranks number two in this sector, so right behind Micron out of 538 stocks. And within its industry of communications equipment, it actually ranks one out of 39. And they are a global leader in providing infrastructure solutions for communications, data centers, and entertainment networks. And that data center aspect is why this stock has been red hot this year, doing incredibly well. On a peg basis, it's at a 51 % discount to the sector.

16:11They have an enormous cash amount per share at$3.18 per share. It's about 42 % greater than the sector. Very positive in terms of analyst revisions. There's been four up revisions and zero down. And it has an EBITDA margin of 23 % and a lever-free cash flow margin of 28%. So, again, looking really, really strong. You could see the profitability grade is an A, and six months ago it was a C+. So, the profitability has actually improved tremendously for the company. Growth has come down a little bit from an A to B minus, but still overall very strong. And analyst revision is very strong for the stock as well.

16:54And if we click on that. By the way, if while you're getting there, if I can throw out a question, one of the questions you released in an article on this topic on Seeking Elf, and one of the questions was about some of these stocks being near their 52-week highs. If you want to bring that context into conversation, I think that would be helpful. Yeah, no, absolutely. So, you know, it's really important as you're looking at this. So I'll just say this has four upward revisions and no downward revisions in terms of earnings estimates from analysts. So very positive. But answering Rina's question in terms of these stocks running up, you can see this is up 303 % in the last year.

17:34That's a massive run near the 52-week high. A lot of people typically are afraid to do that. But you can't make an investment decision based on how much a stock is going to move. I mean, I think all you would have missed on Amazon or Apple or Meta had you said 10 years ago the stock was near a 52-week high. You would miss out on incredible performance over the following 10 years. So what's really to focus on is what I consider sort of the key elements of investing are value, growth, and profitability, and looking at those metrics versus the sector. And that's exactly what we do. So, you can see here the valuation, despite the stock being up 303 % in the last year, the valuation grade is a B-plus versus A-plus six months ago.

18:23So, it's a little bit more expensive, but for a stock that's up 300%, that's still a much better value versus the rest of the sector. The growth has come down a little bit, but it's still B-minus, but the profitability is huge. So, profitability really moving up for the company. And, you know, again, you want to focus on where this company is versus the sector. Not so much, you know, has the stock moved up 100 % or 300 % or 500%. If it's still good value versus the sector and it still has better growth in the sector, that's the stock that you want. You don't want to buy it just because it's on a 52-week low.

18:58And in fact, if you bought a basket of stocks that were at a 52-week low versus a basket of stocks at a 52-week high and held it for a year, you'd have made much more money by investing in stocks that were at a 52-week high. Because typically, if stocks are near a 52-week low, something is either wrong with the industry or with management or with the company, and that's why the stock is traded off. That does not mean it's a buying opportunity. And our third and final stock is Seagate Technology Holding, ticker symbol STX. This company is tremendous. It's got a market cap of$59 billion in the IT sector.

19:34It ranks 6 out of 538. And within its industry of technology, hardware, and storage, it's 2 out of 27. I'm going to take us back to the premium platform. So we can go right to C8. Again, this stock has done fairly well year to date. It's up 212 % last six months. It's up 126%. And you can see the valuation has come off a bit. It's not quite where it was six months ago, but it's still in line with the sector. But look at the growth. The growth for this company is an A+. versus the sector. So I'm going to click on the growth metrics, and you can see why. It's almost straight A's here, and it's because the company has growth that is far stronger than the sector.

20:16So despite the stock moving up, the valuation is still fair compared to the sector, but the growth is far superior. If we look at the EPS growth, you can see it's 102 % growth versus the sector at 10.5%. If you look at the revenue growth forward, it's 24 % versus the sector at 7.9%. So really tremendous growth. And if I click on valuation, you can see PE is actually a B minus and the PEG is an A minus. So a couple of these valuation metrics actually looking very attractive. The others are pretty much in line with the sector. So for growth of that level, again, you put valuation together with growth and you have the PEG ratio.

20:59you can see it's a B plus. It's at a 63 % discount to the sector on a peg ratio. If we look at profitability for the company, you could see that the return on total capital has an A plus grade versus a sector 20, almost 30 % versus a sector 3.9%, very attractive. Net income margin is 17.9 % versus a sector at 4.8%. So fundamentally, these stocks are just really strong and they're heavily, vested or directly vested in AI. So with AI stocks having come off and these stocks having tremendous fundamentals, yet very, very fair valuations, that's why we're focused on these names. I did write an article on this.

21:44So you can just pull it up. I wrote the article a couple days ago, three best AI stocks for the 2025 Santa Rally. So please feel free to look for it. And when you bring it up, if you follow me, you'll get all the articles that I write. Can I ask you, considering that we did this barbell approach on your last appearance with three AI growth stocks and three dividend income stocks, is it a matter of preference in terms of employing three AI-focused stocks? Is that somebody that just more believes in the AI story than is willing to take advantage of the barbell approach that you brought up? And also, if you could bring in the fact that two of these that you've talked about before and why these are why these are two of the strongest picks for the AI sector?

22:29Something I want to point out too, when I look at the AI stocks, I am not just saying I think this is AI. What I'm actually doing is I take a look at three of the largest AI ETFs. And I actually, I'll show you my portfolio. So I take the three largest AI ETFs and I download all the ticker symbols, three largest by market cap. And many of them own the same stocks. There's a couple that don't. But basically, the reason why I do that is I want professionals who are familiar with the sector, who have vetted what has AI and what does not. So I want to make sure we have those in the basket. Just to make sure, just for people listening, is that AIQ, ROBO, and chat?

23:10Correct. Yep. Okay. Perfect. That is one of them. So what I do, as you can see, is I have all the ticker symbols from those ETFs. And then I use my quant system against that. And that's one of the ways that We basically can decide which of the AI stocks we like best, which ones have the best valuation. So MU was at the top of that. You could see Seagate was number two. And then we used Comscope because we wanted something that was a little bit smaller. So we added that to it as well. And that's how we came up with the three. But literally, you could take a cybersecurity basket of ETFs. You could take a cannabis basket of ETFs, just load up the ticker symbols and see where the quant rating shows for all these.

23:57As you can see on the far right here, we have the quant ratings. And then you could see the grades as well for valuation, growth, profitability, momentum, EPS revision. So literally, we rate all the stocks that are in these ETFs using our quant system. It's a great tool to have. You could look at the profitability picture across the board for it, or you could look at the value component across the board, looking at all the PEs and pegs and price to sales and EV to sales. So it gives us the ability to measure which companies actually truly have a value versus which ones are extremely overvalued.

24:32And, of course, when we're looking at the quant ratings, we want companies that are collectively strong on growth, value, profitability, momentum, and EPS revisions. And that's what these grades tell us here. So that's how we actually selected the stocks. First of all, really appreciate that. I think it's very helpful for people to wanting to know more about how you get those picks and also for those wanting to know more about AI picks. I was going to ask you some questions. We had some questions on our previous episode that I was hoping to get to, maybe one of them. I know you're in high demand and you got to get to a webinar right now.

25:08If we could ask one question, then I also wanted to tease your next episode will be a Q &A episode. So for those wanting to ask Steve his opinion, his thoughts on things, leave us a comment, leave us a question, and we will hopefully get to that next episode. And FYI, the whole entire site is on sale right now for 20 % off. So Steve, if you want to talk a little bit about that, and then I'll ask one question before we let you go. I will. It's a great time of year for those who want to look at seeking off a premium or alpha picks or a pro because you get 20 % off. It's the only time of year that we have a sale typically.

25:49Maybe every once in a while we'll have like a July 4th sale, but sometimes we don't. But this is the time of year we have our Black Friday special. So you can get 20 % off. We also have some other products that I did create myself because people, a lot of times they don't want to do all the work or they want to have ideas that are provided to them. So there are two products. AlphaPix is a separate product that I created. So every month we send you two of my top quant strong ideas on the trading date closest to the first and the 15th of the month. And we're looking for quant strong buys. We're looking for companies that have a market cap over 500 million.

26:25The emphasis here is really for long-term investing. And we started this about three and a half years ago. And you can see the product has done very well. It's up about 248 % versus the S &P up 76 % for the same period. Year-to-date it shows Alphapix is up 34%. But I believe year-to-date Alphapix is actually now up over 40%. And the S &P is up closer to 15 % or 16 % for that same period. So again, that is us providing you with our two favorite quant stocks every month. If you want something that's a little bit more frequent, I created the ProQuant Portfolio. That is a fixed portfolio of 30 stocks where Alphapix just continues to add the new ideas.