Kroger, Lennar, and Others Get Into the AI Act

Kroger wasn’t the only company reporting earnings this past week to mention AI. Home builder
Lennar
(LEN) touted something called the Lennar Machine, which combines the company’s “digital marketing platform and…dynamic pricing model to continue to drive sales volume.” It could be the place “where the often talked about AI might find its way into the sometimes-stodgy homebuilding industry.” Lennar stock jumped 4.4% on Thursday, but probably because it easily surpassed earnings estimates and offered strong guidance for the next quarter.

Look, we get it. As everyone knows by now, stocks with direct exposure to AI have been tearing it up this year, from
Nvidia
(NVDA), which has nearly tripled in 2023, to
C3.ai
(AI), which has nearly quadrupled. And until recently, it was just about the only thing that was driving stocks higher. We’d like to jump on the AI bandwagon, too, as long as it doesn’t cost us our jobs.

But choosing the winners might not be as easy as it looks. While Nvidia is an obvious one—and the chip market is already reaping the cash rewards that come from having a big lead over just about everyone else—others have a lot of catching up to do.
Advanced Micro Devices
(AMD), for one, detailed its plans for new processors this past week that would compete with Nvidia’s. It remains to be seen whether the strategy works, and some analysts were unenthusiastic. “We remain sidelined as AMD’s AI vision proves out,” writes Oppenheimer’s Rick Schafer, who has a Perform rating on the stock.

Even the winners might not be the winners. Morgan Stanley strategist Edward Stanley notes that investors tend to forget Amara’s Law, which states that people overestimate the impact of new technologies in the short term but underestimate their long-term implications. Plus, most of the AI winners are probably private companies that most investors don’t have access to yet.

Stanley is watching search traffic for signs that generative AI can avoid that cycle. If people keep searching for ChatGPT and similar products, it would be a sign that demand is strong. So far, so good, but AI imaging products, which came to market before ChatGPT, have seen search volume drop by half from their peak and could be a leading indicator for text-based devices.

With so much still unclear, Société Générale strategist Manish Kabra argues that investors should use a basket of stocks to bet on continued gains in AI, one that is broader than the AI-oriented exchange-traded funds, which have seen 30% inflows this year versus nearly none for equities in general. It has also meant large amounts of money going into individual names, including Nvidia,
Microsoft
(MSFT),
Autodesk
(ADSK), and
Alphabet
(GOOGL), which are among the stocks that appear in the highest number of AI ETFs.

The SG Rise of the Robots/AI Index has 150 stocks, with companies in semiconductors, application and systems software, and machinery. The basket includes everything from well-known beneficiaries like
Adobe
(ADBE) and
Datadog
(DDOG) to puzzlers like
Delta Air Lines
(DAL) and
Boeing
(BA). A basket also helps dilute the impact of companies that try to position themselves as beneficiaries of the technology. “Investors will need to digest waves of AI regulation and risks of ‘AI-washing,’ ” Kabra writes. “We prefer a diversified approach to AI investing rather than concentrated allocations.”

Sometimes, though, it’s worth thinking about the companies that nobody is thinking about—like utilities. Jefferies’ Aniket Shah, for one, argues that the challenges to the U.S. power grid are enormous and are only getting bigger, with demand for electricity growing and supplies of it coming from sources, including wind and solar, that can prove unsteady. Against that backdrop, AI could mean the difference between having power and a blackout. “The grid system will need to dramatically improve the ability to accurately decide how much power to generate, from which sources, and at what time of day,” Shah writes.

AI wouldn’t be a reason to buy utilities now—just as it wouldn’t be a reason to buy Kroger or Lennar—but they might be worth owning anyway. The
Utilities Select Sector SPDR
ETF (XLU) has dropped 4.4% after reinvested dividends this year, as investors shunned anything that appeared too safe. Yet Jay Kaeppel, senior research analyst at Sentimentrader.com, notes that the sector has four things going for it. First, utilities have generally outperformed the
S&P 500 index
during trading days 109 through 197 of the year, otherwise known as the summer. Insiders have also been buying shares as they were experiencing a “washout.” And if investors stop worrying about the direction of bond yields, that could provide a boost for utilities, as well. “Utilities are rarely an exciting place to invest,” writes Kaeppel. “But like every other sector, there are times when this stodgy sector can be a relatively good place to be.”

With AI fever running high, this might be one of those times.

Write to Ben Levisohn at [email protected]