The Antidote to AI Anxiety Is High Quality

The Antidote to AI Anxiety Is High Quality

BY MIKE BURNICK, CONTRIBUTING EDITOR, MARKET MINUTE

AI anxiety has taken hold of the stock market in recent weeks.

Stocks in one sector after another has been laid low due to fears of overnight AI-obsolescence, including…

• Software
• Financial Services
• Data Services
• Cybersecurity
• Transport & Logistics
• Legal & Consulting

The nightmare scenario goes something like this. Artificial intelligence models and their AI-powered agents will instantly disrupt stocks in these industries.

Suddenly transforming them from innovative, high-margin businesses, into lumbering dinosaurs headed to the graveyard.

This may be true for some stocks that are no longer on the cutting edge of consistent improvement.

After all, businesses that don’t possess a durable competitive advantage typically suffer from the laws of “creative destruction.”

But AI is not going to creatively destroy all the stocks in all of these industries overnight either.

And the plunging prices of stocks in these sectors due to the AI-induced panic also creates opportunity.

There is a simple antidote to AI obsolescence, as well as market volatility. And it just so happens to be my favorite investment style: Quality!

Quality Is AI-Proof

Quality stocks tend to have “wide moats” defending their “castles” from competitive threats. And this includes threats from AI disruption.

A moat is simply a durable competitive advantage a business possesses over other potential competitors. Often, this is an advantage of scale. Companies that have dominant market share in a particular industry.

Other types of “moats” are companies that have a large and loyal customer base. Or a company that provides very unique products or services.

Stocks like this also share superior financial metrics that help you spot their quality from a mile away. And that’s where our TradeSmith Business Quality Score (BQS) comes in handy.

BQS is a unique metric TradeSmith created to find high-quality stocks with growing earnings, financial strength, high profit margins, and safety.

In other words, stocks that enjoy durable competitive advantages.

BQS considers the critical traits of stocks proven to outperform the market over the long run, including: 

• Growth in sales, earnings, cash flow, and high returns on equity and assets 
• Profitability compared to both its own history and compared to other stocks
• Safety: low debt, minimal risk, and low volatility 
• Payout: How profits get reinvested to enrich shareholders and grow the business 

Our BQS ranks every stock from zero (lowest quality) to 100 (highest). Stocks with a BQS of 80 to 100 are considered high quality. 

Using BQS as the key filter, our TradeSmith Screener can help you find quality stocks that are unlikely to get disrupted by AI-anxiety!

Simply log into your TradeSmith Finance account and click on Invest from the main menu, then click on Screener from the sub menu.

If you are a TradeSmith Platinum member, or subscribe to Trade 360, then you have full access to our Screener.

Combining Quality and Timing

I created a screener with a few simple filters that searches for healthy, high-quality stocks that have pulled back recently due to AI-anxiety.

To increase my conviction level that these stocks should rebound soon, I also included several of our Trade Cycles timing filters shown below.

• Health Indicator = Green and Yellow zone, which are healthy stocks
• Business Quality Score > 80, the top 20% of stocks ranked by quality
• Cycle Turn Area, Valley
• Cycle Period, Composite Cycle
• Cycle Conviction, Very High, High & Medium
• Days to Cycle Start, 0 to 60
• One Month Change, <0%

Our Trade Cycles filters are designed to uncover stocks that are now – or soon will be (next 60 days) – in a Valley turn area, with a medium- to very high-conviction level.

Just as nature follows repeating seasonal patterns, so do financial markets. Our Cycles filters help you anticipate potential turning points for stocks, ETFs, or indexes.

You can see at a glance when a stock is at or near a Cycle Peak (high) or Valley (low), which indicates a change in trend. A stock in a Valley turn area is likely to move higher.

But you don’t have to limit yourself to just these filters. Simply click on + Add Filter to add more proprietary TradeSmith indicators.

Plus, you can customize your screen including other fundamental, valuation, market classification and more filters.

When I ran this screener yesterday with the filters above, I got 30 results. That’s a good starter list for additional research.

Due to space limitations here, the top 10 results are shown below sorted by BQS, with the highest quality stocks at the top.

Two companies with business moats make the cut: Rayonier (RYN) and Airbnb (ABNB).

RYN is a REIT that manages nearly 3 million acres of prime timberland, an asset-rich business. Could AI obsolescence impact its business?

I doubt it. AI can’t plant and harvest trees… at least not yet.

As for ABNB, it’s a technology company, so AI could be a threat.

But its business has a big moat and high castle walls thanks to a user base of 275 million members that made half a billion bookings last year alone.

For my money, these stocks are among many in these results unfairly victimized by AI-anxiety and the stocks are on sale, which spells opportunity.

And here’s another way to sort the results to zero in on other stocks that have fallen due to AI-anxiety.

We know all stocks that made the cut for this Screener are quality (top 20% BQS), so another way to sort is by 1 Month Change, by clicking on this column to sort by performance.

Here, we see the 10 high-quality stocks that are down the most over the past month, perhaps due to misguided AI-anxiety.

And sure enough, another blue-chip name makes the cut: American Express (AXP).

Will Amex get disrupted by AI? Probably not. After all, AXP is in one of the oldest professions… money lending.

And the company has a wide moat with 141 million loyal customers who see their Amex card as a status symbol.

If anything, AXP can harness AI to improve its business by targeting more credit-worthy customers, leading to fewer losses and higher profit margins.

Bottom Line: AI-anxiety has hit plenty of stocks and sectors hard. This includes high quality stocks that have perhaps been unfairly tarnished. The TradeSmith Screener above is a great way to find the winning stocks that are on sale due to overblown AI fears.

Good investing,

Mike Burnick
Contributing Editor, Market Minute