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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, AI 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 coming up with winning investment ideas. History often repeats itself, and AI models excel at telling investors when they have seen something before.
That’s why our partners over at TradeSmith have been working on a powerful new AI tool to help investors make stock predictions. And last Tuesday, at the AI Predictive Power Event, InvestorPlace analyst Louis Navellier sat down with TradeSmith CEO Keith Kaplan to talk about the exciting research they are doing.
This week, we’ll consider five of the top stocks that this new system and the InvestorPlace team have identified as top stocks that could double your money or more within a year with proper rebalancing.
1. Applied Digital (APLD)
Dallas-based Applied Digital (NASDAQ:APLD) tops TradeSmith’s list of high-potential stocks.
The 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-USD) 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.
Still, Chris MacDonald sees the recent weakness in crypto prices as a temporary setback. He writes that his three top “Forever Cryptos” continues to see rising adoption and rapid innovation, suggesting that even the riskiest parts of Applied Digital’s business still have room to grow.
2. Fastly (FSLY)
Fastly (NYSE: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.
TradeSmith’s system expects Fastly to rise another 6% this 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.
Larry Ramer also believes Fastly has more room to run. In a recent update, he writes how the firm has finally recovered from a massive outage in 2021, and that its 3.5X forward price-to-sales ratio makes it highly attractive relative to its growth rate. The former Fastly bull has finally become a believer again.
3. Mobileye (MBLY)
Shares of the Israeli self-driving firm Mobileye Global (NASDAQ:MBLY) fell this month after Intel (NASDAQ: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 AI believes the tech firm belongs in this category.
Shrey Dua also notes that Mobileye’s shares remain on the right track. He believes Intel’s sale 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 (NYSE: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, Louis noted that stocks can move 10%-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. Buying up small-cap stocks joining the Russell 3000 come with its risks, and investors are likely better off selling NOTE after this month’s catalyst if they intend to continue compounding their 8% monthly returns.
5. Cloudflare (NET)
Finally, investors seeking a safer route to AI riches should consider Cloudflare (NYSE:NET), the world’s largest provider of diversified CDN services.
TradeSmith’s AI algorithm expects 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 (NYSE:WMT) and Dell Technologies (NYSE:DELL) use Cloudflare to host their e-commerce sites.
Growth is also expected to continue at a rapid clip. Street estimates peg topline growth at 30% through 2025, and for net income to rise roughly twice as fast.
That indicates that Cloudflare’s stock will grow into its seemingly high valuations. Muslim Farooque even goes as far as to say the stock is “undervalued” for its vital role in handling the world’s internet traffic. He suggests putting the company on your watchlist and buying on any dip.
For those with shorter timeframes, Cloudflare could also surprise to the upside over the short term. Analysts doubled their 2023 EPS 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 CTO 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’s suffered during its first encounter with Mr. 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.
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.
As of this writing, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.