A Picks-and-Shovel A.I. Play
|
Listen to this post
|
By Lucas Downey, Contributing Editor, TradeSmith Daily
A.I. excitement is everywhere you look…
And I’m not just talking about ChatGPT.
Analysts have touted countless use cases for artificial intelligence, even in off-the-run areas like cybersecurity, health care, and trucking.
When you sit and think about it, is it really a hard stretch to assume that A.I. will impact a lot of industries for the better?
Certainly not…
But, don’t get too carried away dreaming of a world where A.I. powers absolutely everything.
I’ve been investing long enough to see a few new technologies hit the market – namely cloud computing, 3D printing, and solar energy.
All these technologies were exciting at the time, and many are still relevant today. And during that time, plenty of stocks were touted as the next big thing.
But it’s important to understand that every tech movement comes with its share of winners and losers.
That’s how I see the A.I. race unfolding. There will be a handful of standout, long-term winners… and, sadly, many losers too.
It’s important to figure out how to separate an A.I. winner from a loser… and to do it now, while it’s still early days.
So for today’s data-driven piece, I’m going to tell you of one way to bet on A.I. that has a high likelihood of playing out well in the long term…
I’ll even break down one of my favorite stocks to own for this trend, too… And I’ll share why it’s clear to me it’s still not too late to buy great stocks just like it.
Semiconductors Are Your Picks-and-Shovel A.I. Play
Rule No. 1 for tech trends: Don’t follow the fluff. Follow the money.
There’s plenty of high-fluff promises being made in A.I. right now. It’s important to separate the wild ideas about what A.I. could maybe someday do… with what it’s already doing. And what it needs to do it.
The large language models that are at the heart of the A.I. story today require ultra-fast computing power to work. Chip speed and performance is paramount.
As data needs for these models become more intricate, the demand for advanced semiconductors will only grow.
This is why, since the release of ChatGPT on Nov. 30, 2022, semiconductors have been one of the best-performing areas of the market.
Check out the chart below. It shows the performance of the VanEck Semiconductor ETF (SMH; black line below) from Nov. 30, 2022, to today.
It’s more than tripled the S&P 500 ETF (SPY; orange line) and nearly doubled the tech-heavy Nasdaq 100 ETF (QQQ; yellow line):
Clearly for the A.I. gold rush, we should focus on the “picks and shovel” plays. The fundamental needs behind the technology itself.
SMH is chock-full of high-quality companies that fit the bill, including Applied Materials (AMAT) Taiwan Semiconductor (TSM), and more.
But one name, a leading stock in the semiconductor industry, has been on our radar for a long time at TradeSmith: KLA Corp. (KLAC).
And if it’s not on your radar, it should be. Here’s why…
A Superstar Semiconductor Stock for Years to Come
KLA Corp. is a chip supply chain leader, providing tools for inspection and defects. That means as large chip customers spend on A.I. and other semiconductor areas, KLA is part of that growth.
And while stories are good, true fundamental attributes are better.
First, consider that KLA has a rock-solid Quantum Score of 75.9. That’s Jason Bodner’s proprietary measure of a stock’s fundamentals, technicals, and institutional money flows.
This green reading indicates that the company has stellar fundamental and technical attributes, forming one easy-to-understand ranking:
A lot goes into these scores, but the overall number is the key. If the stock is in the “sweet spot” between about 65 and 85, it’s in a strong uptrend with great fundamentals without being wildly overbought.
Speaking of great fundamentals, here’s another two numbers that say you should keep this stock on your watchlist…
On a five-year basis:
- Sales grew from $4 billion in 2018 to $10.46 billion in 2023. That represents a 21% compound annual growth rate (CAGR).
- Net income grew from $802 million in 2018 to $3.38 billion in 2023, amounting to a whopping 33.4% CAGR!
With growth like this, you’d think they’d be shareholder friendly. And you’d be right.
Over the past five years, quarterly dividends have grown from $0.75/share to $1.45/share, representing a 93% increase.
With healthy attributes like this, it should come as no surprise that the stock has dominated returns… and Big Money interest.
As I’ve highlighted before, superstar stocks all look the same through the lens of data:
- Follow the revenue growth
- Follow the earnings growth
- Follow the institutional support
KLA is the poster child of what it looks like to be a superstar quality stock. Whenever a stock fires on all three of these rare characteristics, pay attention.
We have a unique blue signal that fires when this unique setup hits. Every time it does, that means it landed in our Top 20 list for institutional buying activity. In other words, based on our analysis, it was one of the most unusually bought stocks that Wall Street Big Money players were buying that week.
Since ChatGPT was released, KLAC triggered the rare blue buy signal… and it kept repeating:
Now that is a chart signifying strong demand with all-star attributes.
Few companies have similar profiles.
Focus less on the fluff stocks and more on those with outstanding fundamental qualities that reward shareholders year after year.
Regards,
Lucas Downey,
Contributing Editor, TradeSmith Daily