Given how popular artificial intelligence (AI) exchange-traded funds (ETFs) have become in 2023, it’s not surprising that AI-powered ETF stock picks have also gained traction with investors.
The first ETF to apply AI and machine learning to the entire investment process was the AI Powered Equity ETF (NYSEARCA:AIEQ), launched by EquBot LLC in October 2017 in partnership with ETF Managers Group.
“ETFs have made beta ‘smart,’ but with AIEQ we’re looking to make investing intelligent,” EquBot Chief Executive Officer (CEO) and Co-Founder Chida Khatua said at the time of the launch. “EquBot AI Technology with Watson [IBM] has the ability to mimic an army of equity research analysts working around the clock, 365 days a year, while removing human error and bias from the process.”
Khatua remains the CEO of EquBot, which now has more than $4 billion in assets across the company’s portfolios-as-a-service (PaaS) platform.
AIEQ uses AI technology to build predictive models to evaluate 6,000 U.S. companies and identify approximately 30 to 200 stocks with the greatest appreciation potential over the next 12 months. So, there is perhaps no better place to look for stocks chosen by AI ETFs than in AIEQ’s top 10 holdings. Below are the three I like most.
United Rentals (URI)
A magnifying glass zooms in on the website for United Rentals (URI).
Source: Casimiro PT / Shutterstock.com
United Rentals (NYSE:URI) is AIEQ’s second-largest holding, with a weighting of 3.6%. URI stock is up nearly 47% over the past year, compared with an 11% return for the S&P 500.
On June 8, Morgan Stanley analyst Dillon Cumming raised his price target for URI to $428, which is about 4% higher than where it’s currently trading. Of the 23 analysts who cover the industrial and construction equipment rental company, 15 rate it “outperform” or “buy” with a $465.11 average target price, implying upside of around 13%.
In 2022, the global construction equipment rental market was valued at $92.4 billion. It’s expected to grow to $133.7 billion by 2029, a compound annual growth rate of 4.2%.
As the company’s May 2023 investor presentation points out, United Rentals currently has the largest market share in the U.S. of any single company in the industry with 17%. That said, the top three companies in the space only control 34% of the market, leaving a lot of room for expansion.
Over the past 10 years, United Rentals has generated $12.8 billion in cumulative free cash flow with an average free cash flow margin of 16.3%. In 2022, it had $1.77 billion in free cash flow.
Management is forecasting free cash flow of $2.23 billion in 2023 at the midpoint of its guidance. Based on a market capitalization of $28.3 billion, it has a free cash flow yield of 7.9%, which is right on the cusp of what I consider to be value territory (8% and above).
Williams-Sonoma (WSM)
Williams-Sonoma (WSM) store in a shopping mall
Source: designs by Jack / Shutterstock.com
Williams-Sonoma (NYSE:WSM) has been moving sideways over the past year and has underperformed the broader market with a 7% gain. It’s possible investors’ hesitancy has stemmed from the fact that the retailer’s products are discretionary in nature while a potential recession looms over the country.
Williams-Sonoma reported Q1 2023 results at the end of May. Comparable brand revenue declined 6% year over year. As a result of the sales decline, operating income fell 30% from a year ago to $226 million. However, Q1 2022 was a solid quarter, with comparable growth of 9.5%, so a retreat in the latest quarter was not unexpected. Moreover, its two-year comparable growth was 3.5%, and its four-year comparable growth was 46.5%.
For all of 2023, management expects revenue to be flat at the midpoint of its guidance, with an operating margin of 14.5%. Over the long haul, it expects “mid-to-high single-digit annual net revenue growth with operating margin above 15%.”
In May, the company launched GreenRow, a new brand focused on “modern heirlooms,” utilizing its in-house design team. Who knows if it will be the next Pottery Barn, but the company keeps innovating.
WSM is AIEQ’s fifth-largest holding, with a weighting of 3.2%. So, while it’s been a lackluster investment over the past 12 months, the AI powering the ETF thinks this trend will reverse over the next year.
Dick’s Sporting Goods (DKS)
Exterior of Dick's Sporting Goods retail store including sign and logo.
Source: George Sheldon via Shutterstock
Dick’s Sporting Goods (NYSE:DKS) is AIEQ’s ninth-largest holding, with a weighting of 2.6%. The retailer recently announced a marketing campaign across all media platforms — TV, online and social media — with Nike (NYSE:NKE) entitled “Sports Change Lives.”
The shot across Foot Locker (NYSE:FL) likely happened because Dick’s has a much stronger omnichannel business with 65% of its customers shopping both online and in store versus 7% of Foot Locker’s customers. Dick’s also generates far more revenue from its loyalty program than Foot Locker does.
In May, Dick’s reported healthy Q1 results, with same-store sales up 3.4%, net sales up 5.3% year over year to $2.84 billion and adjusted earnings per share up 19% to $3.40. It’s also important to note that the company reduced its total debt in the quarter to $1.48 billion, down 24% from a year ago. With higher interest rates, retailers must cut debt as much as possible. And it continued repurchasing shares, buying back $57.7 million worth of its stock.
Management reaffirmed its 2023 guidance, projecting same-store sales growth of up to 2% with $13.35 a share in earnings at the midpoint. Shares currently trade at 10.1 times forward earnings.
Dick’s Sporting Goods remains a well-run organization with longtime former CEO Ed Stack serving as executive chairman, and Lauren Hobart, who has been with the company since 2011, as CEO.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.comPublishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
