Take advantage of recent artificial intelligence sector volatility by buying fundamentally strong infrastructure leaders like Lam Research (LRCX) and Seagate Technology (STX), while avoiding high-valuation, low-profitability plays like AXTI. Target underpriced software and consulting firms successfully monetizing the AI trend, such as Morningstar (MORN) trading at 16 times forward earnings and Q2 Holdings (QTWO) at 18 times free cash flow. Capitalize on cheap energy stocks benefiting from elevated oil prices above $80 a barrel, specifically Chevron (CVX) which generates massive free cash flow at under 12 times forward earnings. Accumulate shares in Suncor Energy (SU) while it trades at an attractive valuation of around 6 times EBITDA following a 41% revenue surge. Monitor geopolitical risks and potential Middle Eastern pipeline projects heading into 2027 that could impact oil prices and adjust your energy holdings accordingly.

Artificial Intelligence Sector (AI)

• AI-related stocks have experienced a volatile few weeks, including a sharp correction in semiconductors, memory stocks, and data center companies, which led to the blow-up of a highly leveraged fund called situational awareness.
• Despite the market sell-off, fundamental performance remains strong across many AI-related companies:
  • Google Cloud (GOOGL) reported revenue growth of 82%
  • Bloom Energy (BE) grew its sales by 165%
  • Seagate Technology (STX) guided for 56% growth
  • Lam Research (LRCX) guided for 52% growth
  • AXTI grew sales by 77%
• Valuations remain high despite recent price drops; for example, AXTI trades at 16 times next year's revenue while being barely profitable.
• Some specific companies showed weakness or missed expectations:
  • Vertiv stated that data center business growth would decelerate next quarter
  • Teradyne (TER) reported that sales would actually decline
• Overall, the AI sector remains a mixture of high growth and high uncertainty.

Takeaways

• Look past the broad sector volatility and focus on individual company fundamentals, as revenue growth remains exceptionally strong for top performers.
• Exercise caution with high valuations, ensuring you do not overpay for high-growth stocks that carry high uncertainty or limited profitability.

Software and Consulting Stocks

• Software has been one of the hardest hit sectors due to investor fears of AI disruption, resulting in slower revenue growth for some companies.
• However, the impact is not shared equally, and some software and consulting stocks appear underpriced:
  • Q2 Holdings (QTWO), a banking software company, reported a robust 13% growth rate and trades at 18 times free cash flow
  • Morningstar (MORN) trades at 16 times forward earnings following another solid quarter
  • Huron Consulting Group (HURN) saw its shares pop 40% after reporting a 16% acceleration in revenue
• While the threat of AI is real, certain consulting firms are successfully benefiting by helping clients adopt and integrate AI systems, though the market is still pricing in these shifts.

Takeaways

• Screen for individual software and consulting companies that are successfully monetizing the AI trend rather than suffering from it.
• Look for reasonable valuation multiples, such as Morningstar trading at 16 times forward earnings or Q2 Holdings at 18 times free cash flow, to find potential value.

Energy Stocks

• Energy has been the best-performing sector of the year, driven by conflict in Iran that pushed oil prices above $80 a barrel.
• Despite strong performance, most energy stocks still appear inexpensive:
  • Chevron (CVX) reported $18 billion of free cash flow in a single quarter while trading at under 12 times forward earnings
  • Suncor Energy (SU) experienced a standout quarter with revenue surging 41% and net income more than tripling, while shares trade at around 6 times EBITDA
• Risk factors mentioned include the potential for oil prices to fall back if Middle Eastern countries successfully fast-track pipelines to bypass the Strait of Hormuz, which could soften oil prices heading into 2027.

Takeaways

• Consider established energy giants that are generating massive free cash flow while trading at modest valuation multiples like Chevron and Suncor Energy.
• Keep a close eye on geopolitical developments and infrastructure projects, such as alternative pipelines, as potential catalysts that could lower oil prices and impact the sector.