Steven Cress' top 10 AI stocks

0:10Steven Cress:Welcome back. The man, the myth, the legend, Steve Cress. Always great to have you on Investing Experts. Always great to talk to you. Welcome back to the show, first of all. Thank you so much for having me. Always a pleasure to be here and truly appreciate you organizing it. Thank you. Thank you for making the time. We appreciate you. If I can speak for the audience as a whole, which I will. Before we get to the matter at hand, which Steve is generously going to share with us the top AI stocks for 2026 and tell us why the AI sector is worth looking at in the first place. But before he does so, I am going to very quickly read a disclaimer beginning now.

0:53Steven Cress:We 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 Content is presented as of the date published or indicated and may be superseded by future events.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.

1:30Steven Cress:Seeking Alpha is not a licensed security dealer, broker, U.S. investment advisor, or investment bank. Rina, can you repeat that? Can you hear me now? Just kidding. A little slower for those in the back. Feel free to play this at whatever speed you like. Steve, share with our audience, if you would, please, how you're looking at the market these days, very beginning of February 2026, and what you think of this AI sector, which so many companies you could put under that umbrella, couldn't you? Yeah, well, I think the timing of the podcast today is excellent. And I feel like I have deja vu to like almost a year ago, when DeepSea came out, and the AI stocks got crushed.

2:17And it was the beginning of like a market decline that went from really, I guess, the end of January all the way through to April. and the market, the S &P 500 at one point, I think was off about 15%. And a lot of the stocks that we like that had strong fundamentals were off 20, 25, 30, 40 % with nothing wrong with the companies. And yeah, it just really feels like deja vu. And I will say there are a number of comments that are very attuned to what's going on. And I can recall a year ago, A lot of people actually reaching out, thanking me for basically telling them everything is okay back in March and April and take advantage of the dip.

3:04And they made a lot of money. And I feel like, of course, I don't know, tomorrow these stocks could rebound right away. It doesn't feel like we have the same type of catalyst that we necessarily had a year ago. But we did have deep seat. And that really was sort of a major catalyst for the tech stock selling off. Tech has been all over the place in terms of volatility since really October. AI stocks sold off a lot on overstretched valuations. And the high beta stocks, some of them sold off as well. Then they came back. Then they sold off again. There's just a lot of volatility out there. But what I truly like about the stocks that we recommend in our quant system is that we're making our strong buy recommendations based on the data.

3:50and the data ultimately comes down to how well these companies report their top and bottom line growth. And when they do that consistently, if you can ignore the white noise, and if you have a little bit of courage, you typically end up doing really well because eventually fear and sentiment fade and the market does return to fundamentals. We could be at the very beginning stages. We have seen a lot of volatility back and forth. Haven't seen a deep, deep sell off yet, But today, it certainly feels like some of these stocks are getting crushed. So that kind of takes us to, you know. Can I?

4:25Steven Cress:Sorry, can I ask you just really quickly? I'm curious from the people that you hear from, from the investors that you hear from, do you feel like experience helps investors stay the course and not get too freaked out by the volatility? Do you think that helps or not necessarily? As long as your experience is to ignore the talking heads. and uh you know there are a lot of people who could be your habits early basically yeah they still get very fearful that you know people can panic it doesn't matter necessarily how long they've been in the market but i do feel like people who have a lot of experience have seen this you know many many times every few years um and it seems to the the corrections seem to be even more often than every few years at this point and uh you know if you just look at the underlying fundamentals and particularly with, you know, the companies reporting fairly good numbers, uh, you know, even, you know, are some of these top, uh, semiconductor companies and chip companies have had really good results.

5:22Uh, they're getting absolutely smashed. And it's so interesting because, you know, the AI trade has really just been in place maybe like two years. And obviously it's going to last a lot more than two years. as you go beyond the Magnificent Seven and into many other technology companies and many other industries and individuals who are incorporating AI into their daily lives. This is a trade that's going to last a very long time and it's going to be very broad. It's not going to be really concentrated just to the Magnificent Seven. But it's been a really interesting market. And this slide, we call it a tale of two cities.

6:00There are broad market rallies and then there are safe haven rallies. And, you know, what has occurred over the really the last, I'd say, six months to even more recently, we had geopolitical events, which were Greenland, Venezuela, Middle East tensions, of course, tariff threats, you know, some of the geopolitical events creating the movements to the safe havens, you know, which I just had mentioned. And what's really odd now is like when we're seeing a sell-off in the safe haven sector being gold and silver, we saw that last Friday, then it rallied back yesterday, then it sold off again today.

6:37And the market is in like such a confused state that typically gold and silver, which fall in the material sector, materials will sell off in general, and you'll see gold and silver fall off. But today, even within the material sector, there seems to be a rotation where the sector is performing well, but not the gold and silver stocks. So those were getting crushed. So the market is in a really confused state. And then with AI, you know, when we see the broad market rallies and the focus on the AI stocks, people are beginning, investors are beginning to learn many companies outside of the Magnificent Seven are benefiting.

7:15As I mentioned, you have manufacturing and healthcare where there's AI integration. You have individuals who use ChatGPT to write their emails for them. It gets very basic. Or you have many companies using it to write code where they used to have to have programmers. So there are tremendous efficiencies that are taking place. And of course, this has created tremendous demand on energy and the data centers as well. So there's that wave of AI adoption. And, you know, some days plays into the favor of the stocks. Some days people move out of the stocks. Mostly, you know, what we see is usually a fear of a software provider or equipment provider introducing AI of greater efficiency.

7:59So the market gets scared and it gets very scared because so many of the stocks are very overvalued in terms of their conventional PE ratios. And then, of course, you have what's happening with the Fed. So in the back half of last year, it wasn't really the sticky inflation that moved the Fed to lower rates. It was concerned about labor. And that sort of died down coming into January. So there was no rate cut in January. The talk coming out of the Fed is that the labor market seems to be OK. Inflation still seems sticky. So we're not going to get the rate cuts we want. But of course, President Trump announced his new pick for the head of the Federal Reserve.

8:41And it is likely that we will see rate cuts. So the market is just like in a very confused state right now. And you know what? The people that benefit are the ones who could take advantage of the dips and find the companies with strong fundamentals. I'm on Seeking Alpha Premium right now. And we have just tremendous tools. One of the tools that I look at multiple times a day is our market data page. So if you look at the left-hand menu on the navigation bar there, you'll see market data. And when you look at market data, you can look at all kinds of things. You can look at sectors, market cap, commodities, ETF strategies, bonds, cryptocurrencies, currencies, just a whole bunch of choices.

9:18And right now, I'm just looking at the sectors in general. As I explained before, even though we have gold and silver coming down, we actually have basic materials as one of the better performing sectors today. If you go towards the bottom, you can see technology is selling off quite sharply. If I were to click on commodities here, we could see today, silver is actually trading up now. We do concede to see gold come off a little bit, but it's actually far off the lows from where it was earlier in the day. Other sectors of the materials are energy, agriculture. So just sort of a whole host of data points and sectors and asset classes that you can look at.

10:03So I wanted to give everyone a picture there, let them know that this page exists. So often you could tie that to what's happening to the market. So I'm going to take us back to our presentation. And I just wanted you to have a fresh picture. So the market rally rallies, the market cools, the market comes off. As you saw, energy stocks over the course of the month, energy has done quite well. If we went over the course of the year, energy would not look that great of a performer. But in the last four weeks, it has. And it's rose, obviously, by just being super, super freaking cold throughout the United States.

10:39Whether you live in Florida or Maine or Minnesota or Michigan, it's been absolutely freezing. I think Greenland has actually been recording some of the coldest temperatures that they've ever had. So it's just cold all over the place. So we've seen a really big pickup in energy. Noticeably, consumer staples is the second best performing sector on the month for the last four weeks, I should say. And that's after lagging for the entire of 2025. It's actually having the best January in over a decade. And again, investors are sort of using this as a safe haven and a defensive sector to move into. Consumer confidence hit its lowest level since 2014.

11:20So again, a lot of mixed data points coming out. And then starting last Friday, as I mentioned, we had a huge sell-off in gold and silver as President Trump announced that the new Fed chair rallied back on Monday, then sold off again today, but it's coming back from the lows on the day. so where are we with ai and all this because that's what i want to focus on today i think there's uh just a tremendous opportunity and the whole presentation today is focused on our top 10 ai stocks and i'm going to give you a peek of that right now these top 10 stocks on average today are down almost six percent and i'm actually loving this because it's just a great opportunity these stocks have wonderful fundamentals uh they have tremendous growth compared to the s &p 500 They have tremendous growth compared to the MAG7 stocks.

12:08But you can see the majority of them are getting crushed today. You have Applovin, Credo. You have Micron Technology. You have Hutt. You have Celestica. Just absolutely getting hammered. Most of these are really big market cap stocks as well that are coming off. This is actually an earnings page in our portfolio tool. And you can see, I'm going to sort of sort it by the company's and their most recent earnings announcements. And you can see every one of these stocks, okay, going back from November to February 3rd, every single one of them beat expectations in terms of their earnings per share, and pretty handedly as well.

12:47I mean, these are some huge beats. Light came in at a$0.26 surprise to the upside. Celestica came in at a$0.13 surprise to the upside. Even General Motors, and I don't think anybody expected that, that came in at a$0.24 surprise to the upside, and that is one of our AI stocks. Point being, you can look at all 10 of these companies and their recent earnings, and they're absolutely crushing it. Only one company missed at the top line. That was GM, and it's minuscule. It's like$740 million, which is nothing for a billion-dollar revenue generator. So earnings look good, fundamentals look good, but the stocks are getting hammered.

13:26To me, whenever I see strong fundamentals, especially quarter after quarter, I know these are stocks that I want to buy on the dip.

13:33Steven Cress:I know that you've answered this question in various forms many times. But because of these big slides, what would you say about the change in quant ratings? And also because these are picks for the year, what happens when these buys become holds and do they become sells and what happens then and what does that mean and how long is the holding and what would you say to those questions? Yeah, so I'd say a hold means hold. It doesn't mean sell. So if you have a stock that goes from a strong buyer buy to hold, I would not be selling it, especially right when it happens. and in fact in our Alphapix product we keep holds in there for 180 days so I do have a lot of faith in maintaining holds especially if the companies have good fundamentals after 180 days if the stock isn't doing anything you know and the fundamentals look like they're deteriorating you know we're not getting any better I'll typically say it might be time to let go of that stock but just remember hold does not mean sell however sell and strong sell that does mean sell So something has happened.

14:40The factors have changed. The valuation is either crazy expensive. The growth might be dropping. Profitability might be getting weaker. Momentum and analyst revisions could be getting marked down. And that's typically what will generate sales. So when you do see sell, that is a time to sell. And again, it's data driven. It's not like an opinion necessarily on what management is saying or an analyst is saying. It's the fundamentals of the company changing compared to its sector. and it's becoming weaker. And that is your signal to get out when you see that seller strong sell. So hopefully that, and we do get that question.

15:15So thank you for asking that. But in terms of AI, this does not look like a sector you should sell. This is a snapshot of the rapid adoption that we're seeing in this business. So the global AI market is expected to hit 3 trillion by 2033. And of course it's being fueled currently by big tech investments and booming data center demand. But we're also seeing this brought it out to many other sectors, whether it's healthcare or legal or manufacturing, AI is taking place all over. So there is just a tremendous amount of CapEx, not only from the MAG-7 stocks, but from the broader market as a whole and companies, as I should say, at all.

15:56Artificial intelligence market by size. It's anticipated growth from a combination of services, software, and hardware. And you can see in all the categories, it's really growing. So we look at where we are now, sort of at the 2026 level, we could see it at$539 billion. And just by 2033, it's growing to over$3 trillion in terms of the market size. So it's absolutely tremendous. And to put it in a perspective, if you think about ChatGBT, right now ChatGBT has over 1 billion monthly active users. If you look two years ago, it was only 200 million years ago. And if you went back three years ago, it wasn't even existing really for that matter.

16:40So the level of adoption has just been absolutely tremendous. You can see there are a number of ETFs. Here we highlight one ETF in particular, the Global X Artificial Intelligence and Technology ETF, looking at it compared to the S &P 500. And you can see the return is almost double. and you're going to have periods like today where based on valuation fears or based on news and sentiment, the stocks have come off dramatically far more than the S &P 500. But based on the previous chart that I showed you, that growth rate is far, far superior to the rest of the S &P 500 in terms of the size that these companies will be growing.

17:22So I think it's a bare minimum could be great to add an ETF that's focused in artificial intelligence to your portfolio. But if you want to take a more active role, we have stocks that we're going to be highlighting as well. And this was yesterday. So this was from the Wall Street Journal. I thought it just sort of made an interesting picture. Sometimes it's worth a thousand words. And as you can see, there are new worries about the threat posed to AI tools and software companies that sparked the slump yesterday in the technology shares. And it really intensified. The NASDAQ at one point was down about 2%.

17:55percent. You can finish down more than a percent and a half. And of course, today it's off pretty significantly as well. Data provider stocks and private fund managers drop after the Anthropic release, which again, that's in software and just showing a lot more efficiency than the existing software, which in terms of efficiency, it means that we'll have less demand on data centers and less demand on energy. So same thing that we saw a year ago on one company, DeepC, it threw the NASDAQ and AI stocks into a panic, but it was pretty short-lived. It was about two months, but it just presented an incredible buying opportunity at that time.

18:35This is sort of along the lines of the question that Rina just had in terms of holds and sells. Quant is really, it is fundamental analysis. It is the techniques that we use at Seeking Alpha are the same analysis techniques that an analyst would use at Morgan Stanley or Merrill Lynch, Goldman Sachs. We're looking at the same type of investment characteristics, which would be value, growth, and profitability. In our quant model, we actually look at additional investment characteristics. We look at momentum and we look at analyst EPS revision. So our model is actually, It's historical looking in the data, but it's also forward looking where we take analyst consensus estimates for revenue, EBITDA, earnings per share, and a number of other metrics as well.

19:19One of them being earnings per share, but we actually look at the quantity of analysts that are taking their numbers up on a company and the quantity that are taking it down relative to its sector. So I tend to refer to our approach really as a GARP approach, which is growth at a reasonable price. But what we're doing is, you know, quant really uses data and math and algorithms to identify these investment opportunities within these investment characteristics. So having been an analyst myself, when you write investment research reports and you cover a sector, you can really only cover maybe 15 or 20 companies because you're literally doing it manually.

19:56You create your spreadsheets and the spreadsheets, you're looking at your stocks compared to the sector. Then you have to take the time and effort to write investment research reports. So if you cover about 20 stocks, maybe you can get two solid reports out a month and maybe sort of a monthly to update and maintain information on other stocks. But you can't really generate thorough research reports on every company every day. And what's amazing about quant is we're marrying these investment characteristics with the power of computer processing. So instead of just covering 20 companies, we can cover 5 ,000 stocks and we can update or refresh the data every single day and generate our strong buy recommendations or our sell recommendations, what I refer to as the directional recommendation, as well as the investment characteristics of value, growth, and profitability.

20:46So every day we're taking a look at each company's balance sheets, income statements, cash flow statements, hundreds of financial metrics. And we take those data points for each company and we compare it to other companies in the sector. So we separate the strong from the weak and we rank each individual company on every metric and then we sort of total it up. So it gives us an amazing, powerful tool to be able to assess every company almost in a real time basis every day. So if you have a research report that's written by an analyst that's two months old, I would never be able to look at a report that's two months ago.

21:20It's like looking at a newspaper article from two months ago and trying to make an investment decision. Quant updates every single day. So I know I have fresh data at my fingertips. And that's why I really like Quant and I've been doing it for a while. Pretty strong results as well. A graph that shows the performance of all our strong buys updated every single day going back five years. and we compare it to Wall Street strong buys and to the S &P 500. This gets refreshed every single day. And you can see going back five years, the performance for the quant strong buys is up 203 % compared to Wall Street analyst strong buys up only 17 % and the S &P 500 up 67%.

21:59So by focusing on these core characteristics, what we do is we're looking for companies that are collectively strong on growth, valuation, profitability. and by identifying the companies that are strong on those metrics, we have a number of strong buys. And then this shows the record of all the strong buys. So really, this is not an ETF or it's not a mutual fund. But what we're trying to do here is showcase how this strategy works. And as you can see, it works quite well. And you can use this strategy for selecting individual stocks or groups of stocks.

22:32Steven Cress:Steve, can I ask a question that was left on when we posted your top 10 stocks for this year for 2026? And one of the commenters said that when the high quant grades are only momentum and revisions, that's when they don't trust necessarily the strong buy. What would you say about using the various factors in concert with each other? Well, part of the strength is is using multiple factors. There are definitely quant models that are focused just on momentum or just on growth. I think the power of the model that we have at Seeking Alpha is it's diversified in the base of factors that it looks at.

23:13So we're looking at both value, we're looking at growth, value, profitability, momentum, and EPS revision. So we're not reliant on just one factor. There's also a fair amount of diversification in terms of sectors and market cap as well that falls within the model that we have. So I think that diversification helps. If I saw like every grade was an F and momentum was an A +, I would agree with that person. Like I would avoid a stock that was just strong on that only one factor. So the beauty of our system is we're looking for companies that are collectively strong across a number of factors.

23:50Steven Cress:Much appreciated. Yeah, so I'm going to get into our top 10 AI stocks and how I pick them. I am not an AI expert, so I want to start by saying that right at the beginning, but I am relying on AI experts to pick these stocks. So what we have done is we've gone to the four largest AI robotic ETFs, and we've uploaded the ticker symbols from those ETFs into our Seeking Alpha quant system. So I'm letting professional managers vet the process who can ensure that the companies that are within our ETF basket are aligned with an AI theme. And I feel very comfortable by using the four largest ETFs that focus on that.

24:33So we then run those companies through the Seeking Alpha Quant system, where we look for companies that are collectively strong in the factors that I mentioned. And that is how we pick the strongest AI stocks. And I think often you'll find that the stocks that we're focusing on are very different. If you go into those ETFs, you'll see the top 10 stocks in those ETFs are typically very different than what we're recommending as a strong buy. But it's great that we have the universe of stocks that have been vetted by them to select AI stocks that are AI stocks. So when we use our process to select our top 10 AI stocks, we are seeing tremendous growth in the ones that we're selecting.

25:17So by comparison, if you look at forward review growth estimates, and as I mentioned earlier, when we look at forward growth estimates, we're taking consensus, Wall Street consensus estimates from usually reviews and earnings. And that's exactly what we're showing here. So our top 10 AI stocks have a forward revenue growth rate on average of 38 % and a forward earnings per share growth rate of 99%. And when you compare that to the S &P 500, the S &P 500 only has a revenue growth rate of 6 % and an EPS growth rate of 10.6%. So the growth rate for these top 10 AI stocks completely crushes the S &P 500, but it also crushes the MAG 7 stocks.

25:59The MAG7 stocks on average have a 17 % revenue growth rate and a 20 % EPS growth rate. So the stocks that we have selected are far, far stronger in terms of both our top and bottom line earnings. So I'm going to go through the picks actually fairly quickly. First pick is Lumentum Holdings, ticker symbol LITE. You're going to see a common thread. These are mostly in the IT sector. There's a variation of industries, but there are a couple of stocks that actually are not in IT. and I will highlight this. Lumentum Holdings is in the IT sector and within communications equipment, it ranks one out of 38.

26:37The stock is up 402 % in the last year, but I will highlight if you look at the valuation, it is a little bit more expensive. If you look at the far right side at a D plus grade. Now these are all sector relative. So this means where's the valuation or growth or profitability compared to the sector. It is a little bit expensive compared to the sector. Definitely a bit more expensive than it was six months ago, but the growth is an A plus on the stock. So it is growing far faster than the rest of the sector. If you look at the long-term growth rate, a three to five year CAGR, it is at 61 % compared to the sector at only 16%.