Artificial intelligence leveraging the raw power of Big Data might just be the edge tactical investors and traders need to navigate an increasingly uncertain market.
Rising interest rates, stubbornly elevated inflation and mounting fears of recession have stocks climbing a wall of worry as we approach the midpoint of 2023. Although the S&P 500 is on pace to deliver high-double-digit percent returns this year, it still feels as if the bottom could fall out at any time. After all, technically speaking, we're still in a bear market.
"Investors seem to be in a wait-and-see mode, looking for more clear indicators to give them confidence about the future direction of the market one way or the other," writes Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. "A variety of factors are at play in the current environment that could influence whether a sustained rally begins or if stocks will lose ground."
Stock Picks by Artificial Intelligence
Artificial intelligence (AI), machine learning and big data are hardly new to the world of stock picking. But, traditionally, they've been available only to institutional investors with deep pockets.
Danelfin is trying to change all that. The financial technology firm's AI-driven analytics platform aims to level the playing field, giving regular folks access to institutional-level technology. The platform, which offers both free and premium plans, uses artificial intelligence to analyze more than 900 fundamental, technical and sentiment data points per day for all U.S.-listed shares and 600 stocks listed in Europe.
After churning through 10,000 daily indicators, Danelfin's algos produce a series of scores. The AI Score, which ranges from 1 to 10, indicates a stock's probability of beating the market over the next three months, or roughly 60 trading sessions. (Higher scores are better.) Danelfin also assesses stocks' volatility and their potential for nasty drawdowns. Stocks with superior Low Risk Scores should help tactical investors and traders sleep better at night.
The last step is to combine AI Score with Low Risk Score to suss out stocks that offer not only the highest probability for short-term outperformance, but also the lowest risk of loss.
Below please find three stocks to watch, based on Danelfin's AI platform awarding them the highest AI Risk/Reward Scores as of May 30. For good measure, we also took a look at what Wall Street analysts have to say about these names' prospects over the next 12 months or so.
And remember: We're talking about the probability of a stock beating the market over the next few months or so, not days, and not years. That means the platform is pointing to the best stocks to buy for tactical investors and traders, not necessarily long-term investors.
- Market value: $11.5 billion
- AI Score: 9.0
- Low Risk Score: 10
- AI Risk/Reward Score: 9.5
Shares in Amdocs (DOX) are lagging the broader market so far this year, but signals picked up by Danelfin's AI platform say DOX is poised for outperformance over the next three months.
The stock's AI Score of 9 (out of 10) is buttressed by multi-month streaks of near-perfect scores for fundamental and sentiment indicators. If there's a blemish, Danelfin's quantitative assessment of DOX's technicals is merely neutral. Nevertheless, DOX's high AI Score and perfect 10 Low Risk Score suggests that shares should beat the market this summer with little chance of suffering a nasty drawdown.
It's also worth noting that Danelfin AI's been sharp in picking up Buy signals on DOX in the past, with a success rate of more than 60%, according to the firm's Trade Ideas tool.
Analysts, who typically look at a stock's prospects for outperformance 12 months out, are likewise bullish, giving DOX a consensus recommendation of Buy, with high conviction, according to data from S&P Global Market Intelligence.
Although Amdocs might not ring a bell with the average retail investor, the software and services provider is plenty well known among its customer base, especially in the telecommunications sector.
"Amdocs's high level of revenue visibility, solid execution, share buybacks and dividends should support a premium valuation vs the market," writes Oppenheimer analyst Timothy Horan, who rates DOX at Outperform (the equivalent of Buy). "We view the company as the predominant global player in the billing and customer experience space for telcos, with a demonstrated ability to execute large-scale and complex projects."
- Market value: $208.0 billion
- AI Score: 9.0
- Low Risk Score: 10
- AI Risk/Reward Score: 9.5
It's pretty easy to make the case for McDonald's (MCD) as one of the best blue chip dividend stocks to buy and hold and hold and hold. Shares in the fast food chain routinely rank among analysts' favorite Dow stocks. And with 46 years of consecutive dividend increases, MCD lays claim to being one of the best dividend stocks for dependable dividend growth.
It should come as no surprise that MCD gets a perfect score for Low Risk. The stock has a long history of trading with much less volatility than the broader market. What's perhaps more surprising is that Danelfin's AI platform has singled out shares in the hamburger chain for market-beating returns over the next three months.
McDonald's stock's near-perfect AI Score is supported by high readings for fundamentals and technicals, but especially by six straight weeks of near-perfect marks for sentiment.
And as with DOX above, Danelfin has been solid at picking up winning Buy signals in MCD in the past. Indeed, since 2017, the algo has a success rate with MCD of 62%.
As noted previously, the Street is quite bullish on MCD these days too. Analysts give the stock a consensus recommendation of Buy, with high conviction.
"We view MCD as well positioned from an offensive perspective (gaining market share in most major markets, driven by strong marketing, improving operations and increased digital mix, and accelerated development) and a defensive perspective (sales have historically remained solid during macro downturns, such as the Great Recession)," writes Truist Securities analyst Jake Bartlett (Buy).
- Market value: $250.0 billion
- AI Score: 9.0
- Low Risk Score: 10
- AI Risk/Reward Score: 9.5
That one of the largest makers of carbonated beverages and other soft drinks should make the list of top stocks picked by AI shouldn't really come as a surprise. As we noted some time ago, PepsiCo (PEP) and other industry peers are great stocks to own when markets are volatile and inflation is running hot.
Indeed, dividends, defense and inflation protection have helped PEP stock generate a total return (price change plus dividends) of almost 10% over the past 52 weeks. That beats the broader market by about 7 percentage points.
Even better, Danelfin's AI platform says Pepsi stock isn't done generating alpha just yet.
PEP stock gets near-perfect or perfect scores across the board from Danelfin's algos, making it the runaway top stock to watch for outperformance over the next few months. Consistently high readings for fundamental, technical and sentiment indicators inform PEP's almost perfect score for projected outperformance.
Meanwhile, PEP has always been a low volatility stalwart. We're oversimplifying here, but with a five-year beta of 0.55, PepsiCo stock can sort of be thought of as being 45% less volatile than the broader market.
As popular as PEP is with AI for short-term outperformance, the Street likes its chances over the next 12 to 18 months too. Analysts give it a consensus recommendation of Buy, albeit with somewhat moderate conviction.
"PepsiCo is a well-managed company with a valuable brand portfolio, and continues to generate solid growth amid weak demand for many consumer staples," writes Argus Research analyst John Staszak (Buy). "We think that investors will continue to favor the shares given the company’s ability to raise its dividend and deliver strong growth."
On that last point, don't forget that PepsiCo has increased its dividend annually for 51 years and counting.
