7 of IBM Watson's Top Stock Picks

by Eren Rosa
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IBM Watson picked these stocks to outperform.

Artificial intelligence will likely revolutionize the global economy in the next several decades, and Wall Street is not immune to the AI disruption. In fact, financial services company EquBot is already leveraging the power of the IBM AI Watson supercomputer to manage a unique exchange-traded fund, the AI Powered Equity ETF (ticker: AIEQ). Watson selects stocks it believes will outperform the market and adjusts the fund’s holdings accordingly. AI is getting smarter by the day, and the ETF has outperformed the S&P 500 significantly in the past year. Here are seven of IBM Watson’s top stock picks heading into 2021.

Tesla (TSLA)

Electric vehicle maker Tesla has been one of the most volatile and unpredictable stocks in the market, and it may take AI to figure out where the stock is headed. Tesla has the highest weighting of any stock in Watson’s fund at about 4.5%, so the AI stock picker must see Tesla’s insane momentum carrying over into 2021. But with the company valued at nearly the entire size of the legacy auto market and trading at more than 200 times forward earnings and nearly 30 times sales, it’s understandable why many Wall Street analysts are skeptical of Tesla.

Advanced Micro Devices (AMD)

Chipmaker Advanced Micro Devices is another extremely volatile momentum stock that has logged huge gains for investors in recent years. IBM Watson must have identified reasons for that momentum to continue in 2021. AMD recently unveiled its Ryzen 5000 mobile processors at the 2021 Consumer Electronics Show and has already been gaining significant market share from Intel Corp. (INTC) in both PCs and servers for several years now. In fact, it recently surpassed Intel in desktop computer market share for the first time in 15 years, according to PassMark Software. AMD has a 3.6% weighting in the AI fund.

Enphase Energy (ENPH)

Watson clearly has a preference for momentum stocks given solar stock Enphase Energy gained more than 500% in 2020. With Democrats taking control of the White House and both houses of Congress, investors are expecting policies to benefit clean energy stocks like Enphase for at least the next two years. Unfortunately, after the huge 2020 run, Enphase shares trade at a stretched valuation of about 107 times forward earnings and 37 times sales. Watson clearly expects big things from Enphase, which has a 3.1% weighting in its fund.

Alphabet (GOOGL)

Google parent company Alphabet has underperformed the S&P 500 significantly since the beginning of November. Investors are likely concerned about potential regulatory crackdowns on big tech companies by Democrats. Google is already facing three antitrust lawsuits by U.S. regulators and state attorneys general, as well as several lawsuits by private companies around the world. Alphabet has consistently reported impressive growth numbers from its cloud services and online advertising businesses, but investors may be concerned about potential fines or forced changes to Google’s business model. Alphabet has a 3% weighting in the fund.

Moderna (MRNA)

In December, Moderna’s coronavirus vaccine was the second vaccine authorized by the U.S. Food and Drug Administration for emergency use to combat the pandemic. The federal government has already agreed to purchase 200 million doses at reported prices from $32 to $37 per dose. In January, Swiss regulators also approved the Moderna vaccine, and Moderna CEO Stéphane Bancel expects to deliver up to 1 billion doses and generate $11.7 billion in sales from the vaccine in 2021. Moderna shares are up about 500% in the past year, and it has a 2.9% weighting in the AI fund.

Zscaler (ZS)

Zscaler is a market leader in the cloud-based secure web gateway market. As more of the global economy moves to the cloud, cybersecurity will become an increasingly important and valuable business. That importance was highlighted in December when Russian hackers reportedly infiltrated dozens of American companies and government agencies, including the U.S. Treasury. Zscaler’s business isn’t very profitable just yet, but it reported impressive 52.3% year-over-year revenue growth and 61% billings growth last quarter. Zscaler shares are up about 250% in the past year, and the stock has a 2.8% weighting in the AI Powered Equity fund.

Etsy (ETSY)

Etsy is an online marketplace focused on handmade and vintage items. It was one of the biggest winners from the shelter-in-place environment in 2020, and IBM Watson must anticipate that momentum will continue in 2021. Esty shares gained more than 300% in 2020 as the company’s revenue growth rates accelerated into the triple digits. Protective face masks, pet items and domestic merchandise sales were through the roof in 2020 thanks to Americans being stuck at home. But despite difficult year-over-year comparisons, analysts are still projecting double-digit revenue growth in 2021. Etsy has a 2.8% weighting in the AI fund.

IBM Watson computes these stock picks:

— Tesla (TSLA)

— Advanced Micro Devices (AMD)

— Enphase Energy (ENPH)

— Alphabet (GOOGL)

— Moderna (MRNA)

— Zscaler (ZS)

— Etsy (ETSY)

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