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(0:30) – Are there still value investing opportunities in AI stocks?
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(5:40) – Tracy's Stocks to Watch
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(23:00) – Episode Recap: MOD, ETN, GOOGL, MSFT, SMCI
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Podcasts@Zacks.com
Welcome to Episode #371 of the Value Investor Podcast.
Every week, Zacks editor Tracey Liniec Value Investor Portfolioshares some of his best value investing tips and stock picks.
NVIDIA recently reported earnings and talked about an “AI revolution,” and stock investors have been eager to get in on the deal, with the company's stock price up substantially over the past year.
If you're a value investor, you might be sitting on the sidelines thinking that all AI-related stocks are too expensive to even consider, but Tracy believes that all investors should get involved in this new industry in some way. But that doesn't mean she thinks you have to buy expensive stocks to get in.
Trees don't grow towards the sky, and stock prices don't keep rising forever. Even the mighty NVIDIA saw its stock sell-off and sell-off during last year's incredible run. There were buying opportunities.
Value investors should expect these stocks to fall and sell off. It's bound to happen.
What are “AI stocks”?
Currently, companies considered “AI stocks” exist across a variety of industries. The most well-known is the chip industry, where NVIDIA dominates for now.
But these chips are deployed in data centers, and companies building and servicing these centers are also “AI stocks.”
And then there are companies that are operating in the generative AI space, and these companies are using all the data that's sitting in their data centers.
Because data centers require large amounts of electricity, cooling, and other utilities to run, some “old economy” companies are now “AI stocks.”
And it won't stop there: As the ecosystem builds, the AI industry will expand. But for now, these are the most important areas to invest in.
5 Cheapest AI Stocks to Buy Now
1. Modine Manufacturing (Mods)
Modine Manufacturing has been in thermal management since 1916. Truly “old economy.” In fiscal year 2024, Modine's data center business grew 69% year over year.
Modine Manufacturing shares are up 61% this year, but they remain attractively priced at just 27 times forward earnings.
Should a mid-cap company like Modine Manufacturing be added to your AI stock watch list?
2. Eaton Corporation (ETN)
Eaton is a power management company. It was founded in 1911 and has paid dividends every year since 1923. It's the epitome of “old economy.”
But Eaton shares are up 36% this year, hitting new highs, because the company is now an AI stock. But it's not cheap: Eaton shares are trading at 32 times forward earnings and 5.7 times forward sales.
Should power management companies like Eaton be on your watch list?
3. Alphabet Inc.Google)
Alphabet is known for products like advertising and YouTube, and the company is deploying generative AI to roll out new products, including Google Search.
Alphabet's stock price is on track to rise 21.8% in 2024 to a new all-time high. However, Alphabet remains one of the more attractive AI stocks due to its low P/E ratio. While Alphabet stock isn't trading below 15 times earnings, it's still attractive at 23 times.
Could Alphabet be one of the cheapest AI stocks?
Four. Microsoft Corporation (MSFT)
Microsoft was one of the first companies to introduce generative AI capabilities into its products, and investors have driven the company's stock to new highs as a result. Microsoft shares are up 7.9% so far this year but are back down from recent highs.
Microsoft is expensive at these levels. The company's stock is trading at a P/E of 35. But its price-to-sales ratio, another indicator of value, is also very high at 13.5. A price-to-sales ratio above 10 is considered expensive.
At this valuation, should Microsoft still be on your watch list?
Five. Super Microcomputer Corporation (SMCI)
Super Micro Computer provides services and storage solutions in the cloud and datacenter. The company was one of the hottest AI stocks last year. Super Micro Computer shares are up 172% year to date.
However, the stock has been declining over the past three months. Super Micro Computer shares have fallen 14.6% in that time period. And while the company has a forward P/E of 35, its incredible growth has resulted in a PEG ratio of just 0.7. A PEG ratio below 1.0 typically indicates that a company has both growth and value.
Could this weakness be a buying opportunity for Supermicrocomputer?
What else should you know about cheap AI stocks?
Listen to this week's podcast to find out.
[In full disclosure, Tracey owns shares of MSFT and GOOGL in her personal portfolio. Zacks Value Investor owns MOD.]
Want the latest recommendations from Zacks Investment Research? Download today the 7 Best Stocks for the Next 30 Days: Click to get this free report.
Microsoft Corporation (MSFT): Free Stock Analysis Report
Eaton Corporation, PLC (ETN) : Free Stock Analysis Report
Super Micro Computer, Inc. (SMCI) : Free Stock Analysis Report
Modine Manufacturing Company (MOD) : Free Stock Analysis Report
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
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