AI Stocks – and a hint on Uranium

March 18, 2024No Comments

AI Stocks to Watch – Outside the ‘AI Mag 7 Movement’

 

Today we are going to take a look at an unknown – or at least much [00:00:30] lesser known – opportunity that falls under the radar as far as investors who have been fixated on the whole Artificial Intelligence, ‘AI Stocks Mag 7 movement’ that’s occurred since the beginning of 2023. Other opportunities surround this, especially now with the Mag 7 – at least many of them – [00:01:00] reaching points of irrational exuberance in so far as their price performance. Artificial Intelligence (AI) is the real deal. It’s a real movement, but when stocks become overvalued, it doesn’t matter how real the deal is. A fair price is a fair price, and an unfair price is an unfair price.  You’ve heard me talk about this quite a lot lately, so I wanted to suggest [00:01:30] a couple of opportunities that we should be watching that are outside of the scope of the ‘obvious’ Mag 7 and related candidates like Taiwan Semiconductor and others that benefit from AI. I think you will get a real kick out of what I’m going to show you today.

So, this is a [00:02:00] PowerPoint I put together, and this is an opportunity that nobody’s talking about – certainly not the media. The media as you know tends to hype on about whatever is in the news [00:02:16] absolutely, right now. They’re never forward-looking. They drive using the rearview mirror only. We want to drive looking forward out the windshield to see what’s coming. So, let’s take a look.

Well, we know that the Mag 7 (Magnificent 7) [00:02:30] have been the Artificial Intelligence AI Stocks ‘Poster Boys and Girls’. Even some surprising ones like Amazon have been involved with that whole movement. There’s a lot to do with data storage and all kinds of stuff that surrounds what AI means. And so, all of these guys are either developing platforms that surround that or developing platforms to utilize Artificial Intelligence for various commercial and retail applications. So, [00:03:00] it’s all great and their AI stocks have done well for it, but now many of them are overvalued. And in fact, as this slide shows us, we’re starting to see some relative underperformance.

 

Nvidia

As I record this on March 11, [00:03:23] year-to-date, the S&P 500 has done 7.72%. [00:03:30] A very large percentage of that 7.7% return – 2.3% – was contributed to by Nvidia. And down the line, you can see Meta platforms and Microsoft and Amazon. All of these stocks are part of the Mag 7, and they’ve been pretty big contributors. But what’s interesting is the percentage of their contribution to [00:04:00] index return is falling. So since last year, even though Nvidia for example, has had a 2.3% part of that 7.7% return on the market, it is losing its status as the really, really, really, really big contributor to performance on the index. And this is research from Bear Traps courtesy, of Larry McDonald. So, if you go down [00:04:30] the line, this isn’t every S&P 500 company, but you can see some of the more value-orientated stuff like Caterpillar, Stryker, etc., are starting to become more significant insofar as the returns of the S&P 500.

Artificial Intelligence (AI) YTD

If you happened to read my recent blog on the rotation model I talked about in my online investment [00:05:00] course, I noted that things like materials and energy are picking up. Well, the technology and consumer discretionary and a couple of other sectors like communications – which were in the lead – are losing steam.

 

The “Unspoken Opportunity” in Artificial Intelligence – AI Stocks

Alright, so what am I referring to when I say there’s an “unspoken opportunity” nobody seems to be talking about surrounding this change in the Artificial Intelligence – AI stocks market & economy? [00:05:30] Well, Artificial Intelligence (AI) and the cloud and all this stuff are heavily involved with data, and data storage is massive. As AI stocks become more and more powerful, the amount of data storage and data utilization is going to require a lot of power [00:06:00] and people don’t realize that. And, they’re not just talking about electricity, but also water to cool the processing units. (This is from Diversity Net.) There’s managing all this data storage and data utilization, but these are two factors that nobody’s talking about.

 

Energy Sources, Specifically Uranium

Let’s take a look at the Energy Forecast because that’s the one where I think the real opportunity lies. [00:06:30] If we look at the green line here – which is data centers – you’ll notice that the data center energy increase is going to be accelerating at a much faster pace than many of the others that only have networks – which is a factor as well. When it comes to Artificial Intelligence (AI), the data centers, the energy usage is going [00:07:00] to increase substantially between now and 2030. That’s just five years. You see the difference in the arc of that energy consumption.

Artificial Intelligence (AI) stocks Energy Forecast

[00:07:14] This is a quote from Bear Traps, taken from another research piece. The data energy use was near 460 terawatt hours in ’22, and they’re looking at 1,000 in 2026. And this only goes out to [00:07:30] 2030. So, this is big, big news for us who are looking for alternatives to buying into the overbought Artificial Intelligence sectors. And, that is to look for energy sources that meet the needs of today’s more green movement. When it comes to energy, guess which energy source is the cheapest, most realistically scalable, clean, and most efficient for storage and transmission? [00:08:08] Nuclear. This is where I think a massive opportunity lies. And if you have been following my work, I have been talking about Uranium for over a year, and you can see I’ve been right.

This is the Sprott Physical Uranium [00:08:30]. It broke out back here, and it arced up to a very, very high peak. Now what’s happened is, that the chart of Uranium has fallen back quite a bit because as I’ve mentioned before, whenever any stock exceeds 15% of its 200-day moving average, it’s approaching overbought. And generally speaking, you won’t see [00:09:00] stocks or sectors move much past 30% before some sort of a correction. We had a correction back in October of last year on Uranium. As it got around 28% of its index, it pulled back a little bit, but back at the beginning of this year, we saw a 35% move over its 200-day moving average. Uranium has fallen substantially coming [00:09:30] close to its 200-day.

Artificial Intelligence (AI) Stocks Uranium and Water

And you’ll notice on this chart, that once a bull market erupts, you usually do get some following of the moving average. So, I can now say that Uranium looks pretty cheap because it is down to about 12% of its moving average and it could get a little lower, but not likely. There is a level of support here that looks to be broken, and that might just push it down a little bit further [00:10:01]. But you can see there’s an old level of resistance that will become support probably down around the $27 level from the current $28. So I think that Uranium is coming to that point where technically it’s looking attractive. If we look at RSI at the bottom of this chart, it’s moved from an overbought signal back here – when it was way over its moving average – and there to an oversold [00:10:30] signal. So, we have a lot of things going for the probability of a Uranium turnaround, and the fundamentals make absolute sense. For this reason, Craig and I have traded the sector a couple of times.

 

Water

Now, Water isn’t as obvious. This is the Invesco S&P Global Water Index, and it’s just all the different companies that are involved with water processing, water filtration, utilization, sewage, and anything to do with water [00:11:00]. It’s not a pure way of looking at water usage, but it has implications because the more water is used, the more use of these companies’ products and services, like purification and all that kind of thing. So, because there has been a breakout, we can assume that the breakout will eventually see this index get back to its old highs. It’s around 54 – 55 now, [00:11:30] but the highs were around 59 to 60. So, you probably have a 10% upside for the time being. It’s getting a little bit overbought at about 10% over its 200-day moving average, but that’s normal, especially after a breakout.

So, I think the story is good for water, due to that breakout. The target is somewhat limited, but it still looks pretty good. And, I think there’s a fundamental case that can be made for anybody [00:12:00] that’s following this story. Especially if you saw this index pull back a little bit in a market correction, it might be a good opportunity to pick it up, wash out some of that excess here [00:12:10], and maybe get that neckline test and then boom, up to the highs from a lower level, you’d have maybe a 15-20% move.

So, my choice between these two would be to look at Uranium. Again, [00:12:30] people aren’t really thinking in terms of the opportunities surrounding the Artificial Intelligence (AI) movement. They’ve overbought the obvious players to a point where I won’t touch them at these prices. But there are other opportunities out there. I will disclose, that we’ve been buying Uranium stocks, and although we don’t currently own Water stocks, I will certainly be following that chart for a while – and I’m looking for opportunities where others are not. Again, the best [00:13:00] investors look forward, look through their front windshield to see what’s coming and don’t pay so much attention to the rear-view mirror. Thanks for watching. We’ll see you next week.

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