Investing in the AI theme for the long haul. How to pick the winners

Artificial intelligence has shaken up the investing landscape since the groundbreaking launch of ChatGPT in November 2022.

Since then, investors have poured money into all things related to AI as they hunt for the next big winners. In 2023, a group of major technology players dubbed the Magnificent Seven — Tesla, Amazon, Meta Platforms, Apple, Microsoft, Alphabet and Nvidia — contributed to a large chunk of the market’s rally.

Those tail winds continued into 2024, but even the winners eventually reach their limit. Indeed, some of this year’s highest fliers came down to earth on Friday, with Big Tech names dragging down the Nasdaq Composite by more than 2%.

“You have to do your work,” said Jay Woods, chief global strategist at Freedom Capital Markets. “You want to do the research, you want to know what you’re buying, you want to know the risks involved. In AI right now, there are a lot of unknowns.”

AI is poised to be a central theme as the technology transitions from early-stage winners to second-stage adopters. Portfolio and wealth managers say investors may want to undertake certain strategies if they’re looking for long-term plays in the space.

What to look for

There’s no secret formula to investing and picking artificial intelligence stocks, but investors can keep an eye on certain metrics and trends when weeding out the winners from the duds.

When investing in any new industry, Carol Schleif, chief investment officer at BMO Family Office, recommends that investors keep an eye on companies’ cash burn and how they are spending their money. Be attentive to the fine details, including how a company works through a backlog and how much money it devotes toward infrastructure.

When it comes to chip stocks, Schleif also recommends taking a look at government grants. The industry won big in 2022 when President Joe Biden signed the CHIPS Act into law. The measure allocated funds toward building out semiconductor production on U.S. soil.

Samsung Electronics is in line to receive funding from CHIPS for making semiconductors in Texas, while Intel has been awarded up to $8.5 billion from the measure.

“Focus on the underlying fundamentals, and are they moving in the right direction, [rather] than just last quarter’s earnings,” Schleif advised.

Investors should also avoid blindly chasing the hot winners that have benefited from AI enthusiasm. For Laffer Tengler Investments CEO and CIO Nancy Tengler, that means looking at some of the old-economy stocks embracing the new digital wave. She likes Microsoft and IBM, a pair of tech industry veterans.

When building any portfolio, financial advisors and portfolio managers stress the importance of diversification — and the same applies to AI.

An exchange-traded fund might be a good way to get that diversified exposure to a basket of stocks that could benefit from the AI theme, rather than sticking with one or two promising names.

Consider diversifying through ETFs

Selecting ETFs that…