The robots aren’t coming, they’re here. But can stocks chosen by an artificial intelligence (AI) program beat the market? AI has been used for several years by hedge funds, quantitative funds, and some asset managers.
But Danelfin, a financial advice company formerly known as Danel Capital, has developed an analytics platform that harnesses the power of big data technology and machine learning for regular investors.
The idea is to help them make smarter decisions with their stock picks. Here are the top five stocks that this AI program has spat out.
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by Dan Burrows, Contributing Writer, Kiplinger
Danelfin’s AI algorithms analyze more than 900 fundamental, technical and sentiment data points per day for 1,000 U.S.-listed shares and 600 stocks listed in Europe.
The company says that in total its AI predictive scoring capability churns through 10,000 daily indicators.
The platform then analyzes that ocean of inputs to predict the future performance of each stock, calculating its probability of beating the market over the next 90 market days.
Once the algorithm determines which stocks to watch, it spits out a rating known as an AI Score, which ranges from 1 to 10.
In a backtest run from January 2017 through March 2021, U.S.-listed stocks with perfect 10 AI Scores generated average yearly returns of 35.2%, while stocks with the lowest AI Scores of 1 generated average yearly returns of 11.8%.
A more recent test was likewise encouraging. Danelfin’s top 10 U.S. stock picks as of June 23 delivered an average return of 4.4% through Sept. 28. That beat the SPDR S&P 500 ETF Trust by nearly two percentage points.
Here are five stocks to watch with perfect 10 AI Scores as of Sept. 25.
We also took a look at what Wall Street analysts had to say about these names.
We’re talking about the probability of a stock beating the market over the next few months or so, not days, and not years.
That means the platform is more so pointing out the best stocks to buy for tactical investors, but not necessarily day traders nor long-term investors.
5. Foot Locker
- Market value: $5.1 billion
- Fundamental score: 10
- Technical score: 7
- Sentiment score: 8
Foot Locker (NYSE:FL) stock shares a similar trajectory to that of The Gap: strong first-half outperformance as a recovery play, followed by a slump on renewed COVID-19 fears.
But now a perfect fundamental score and strong marks on technical and sentiment factors should return shares in the footwear retailer back to their market-beating ways, according to Danelfin, landing it on the platform’s top stocks to watch.
FL’s fundamental score has been in a strong uptrend since Aug. 23. The technical grade has remained steady at seven for four consecutive weeks, while sentiment vaulted from a low of three as recently as late August to hit eight for two straight weeks.
The Street is bullish on FL for longer-term investors, as well. Of the 20 analysts covering the stock tracked by S&P Global Market Intelligence, 11 rate FL at Strong Buy, three say Buy and six call it a Hold.
Argus Research analyst Kristina Ruggeri (Buy) cites FL having “posted five quarters of solid earnings despite pandemic-related challenges” among her reasons for being bullish on the stock.
“The company has benefited from strong trends in comfort and fitness apparel, pent-up demand and stimulus-driven spending.
The company is planning to launch its own brands later this year. We also have a favourable view of FL’s recent acquisitions which will allow them to target new demographics and geographic regions.”
4. Herbalife
- Market value: $5.1 billion
- Fundamental score: 7
- Technical score: 9
- Sentiment score: 10
Herbalife (NYSE:HLF)) was lagging the broader market for the year-to-date through Sept. 13, but at least shares were positive. An earnings warning issued after the market closed on that day took care of that, however.
The multi-level-marketing company that sells nutritional and wellness products said “lower than expected levels of activity among its independent distributors has led to a decrease in expected third-quarter and full-year net sales.”
HLF stock plunged the following session, and is now down more than 8% in 2021.
The bright side for tactical investors is that the selloff has done wonders for Herbalife’s sentiment and technical scores, per Danelfin’s AI platform, setting HLF up for market-beating returns in the months ahead and making it one of the top stocks to watch.
HLF’s sentiment score stood at eight prior to the drawdown on the earnings warning. It has marked perfect 10s ever since.
The technical reading bounced even more dramatically. It was sitting at a negative grade of four before the bottom fell out of HLF shares.
But now the grade has hit a near-perfect nine for two consecutive weeks. Even the fundamental assessment got a mild boost, to a score of seven from six prior to HLF’s mid-September dive.
It certainly doesn’t hurt sentiment that HLF insiders went on a buying spree after the share-price plunge.
Only four analysts cover HLF each one rates the stock at Strong Buy.
“While the earnings warning took us and investors by surprise, the positives were no remarks were made to indicate anything structurally wrong with HLF’s business or model,” writes CFRA Research analyst Arun Sundaram (Strong Buy), “and third-quarter sales are still tracking double-digit growth versus pre-pandemic levels, indicating long-term upward momentum.”
3. Reinsurance Group of America
- Market value: $7.6 billion
- Fundamental score: 10
- Technical score: 8
- Sentiment score: 10
As one of the world’s largest group life and health reinsurance companies, Reinsurance Group of America (NYSE:RGA) has taken more than its fair share of lumps from the pandemic.
RGA is negative for the year-to-date, but an improving fundamental backdrop and Danelfin’s AI assessment suggest the stock is poised for outperformance as we close out 2021.
As for that fundamental backdrop, analysts note that quarterly results suggest the worst of the impact of coronavirus deaths appear to be behind the reinsurance company.
“Excess COVID mortality was down significantly quarter-over-quarter, as general population deaths declined in major markets,” writes UBS Global Research analyst Brian Meredith (Buy).
Moreover, the company recently lifted its suspension of share buybacks and raised its dividend, both of which are “a strong indication of RGA’s confidence despite Delta variant fears (for which cases are rising, but mortality remains low),” the analyst adds.
Optimism like Meredith’s regarding RGA is clearly showing up on Danelfin’s AI radar. The stock gets perfect marks in fundamental and sentiment scores, and an eight for technical signals.
A favourable valuation and balance-sheet strength help bolster RGA’s fundamental grade, which has notched a perfect 10 for four consecutive weeks. Sentiment has graded a perfect 10 for 12 of the past 14 weeks.
Meanwhile, the technical component of Danelfin’s AI Score has been in a steady uptrend since Aug. 9, when it stood at a neutral level of five.
Despite RGA’s short-term potential as one of Danelfin’s stocks to watch, the Street remains split on the name longer term, giving it a consensus recommendation of Hold.
Of the eight analysts covering Reinsurance Group of America tracked by S&P Global Market Intelligence, one says Strong Buy, one rates it at Buy, three call it a Hold, one says Sell and one has it at Strong Sell.
2. Unum Group
- Market value: $5.1 billion
- Fundamental score: 10
- Technical score: 7
- Sentiment score: 10
Unum Group (NYSE:UNM) is another insurance sector stock upon which analysts cast a cautious eye.
As the nation’s largest provider of individual and group disability insurance products, the Street – with a consensus recommendation of Hold – remains leery of what COVID-19 means for Unum’s top line going forward.
“We forecast operating revenues to be flat to up 2% in 2021, and to rise 1% to 2% in 2022,” writes CFRA Research analyst Catherine Seifert (Hold).
“The degree to which operating revenues and sales rise will depend on UNM’s ability to leverage opportunities for growth amid an economic and labor market recovery, offset by some financial and competitive challenges.”
Danelfin’s AI algorithms, however, share no such concerns – at least over the next 90 or so trading days – with UNM among the platform’s top stocks to watch.
Unum’s perfect 10 AI Score, led by equally perfect fundamental and sentiment grades, should allow shares to catch up to the broader market before the year is out.
Although UNM stock is positive for the year-to-date, its 8% gain trails the S&P 500 by about eight percentage points.
But a perfect sentiment reading in 10 of 12 past weeks, three consecutive weeks of steady and positive technicals, and seven straight weeks of perfect 10 fundamental readings have shares set to break out.
As noted above, analysts are mostly on the sidelines when it comes to UNM’s longer-term prospects.
Of the 10 pros issuing opinions on the stock tracked by S&P Global Market Intelligence, one says Strong Buy, eight have it at Hold and one calls it a Sell.
1. Kemper
- Market value: $4.3 billion
- Fundamental score: 10
- Technical score: 8
- Sentiment score: 9
Kemper (NASDAQ:KMPR) stock is off nearly 13% for the year-to-date, hurt by a nation getting back to business and life as usual after a prolonged period of pandemic-induced hunkering down at home.
Kemper is one of the largest writers of specialty personal lines of insurance in the U.S., with property casualty insurance accounting for approximately 86% of its premiums.
The issue with the company these days is that its PC insurance business is predominantly personal auto.
“Auto losses are rising due to a rebounding economy, inflationary pressures and a tougher litigation environment,” writes William Blair equity research analyst Adam Klauber (Market Perform).
“While the company is taking corrective actions to turn the tide in auto, this will likely take several quarters to produce results, and earnings should remain under pressure in the near term.”
KMPR’s perfect 10 AI Score is bolstered by a 10 for fundamental factors – a level it’s maintained for eight consecutive weeks.
Technicals have ranged between eight and nine for four straight weeks, while sentiment hasn’t fallen below a grade of eight on a weekly basis since late May.
Add it all up, and KMPR leads Danelfin’s list of stocks to watch with perfect 10 AI Scores as of Sept. 25.
The Street is mostly bullish on the name, as well. True, only five analysts cover the stock, but their consensus recommendation stands at Buy. One rates KMPR at Strong Buy, three say Buy and one has it at Hold.
Their average price target of $80.75 gives KMPR stock implied upside of about 20% in the next 12 months or so.
All images: Getty Images
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