Stocks Are Doing Something Rare. That Spells Opportunity. — Barrons.com
By Jacob Sonenshine
Returns for individual stocks have been all over the place, posing opportunities to buy fallen names. Cybersecurity and financial services are two great places to look.
Wall Street has been sorting through a lot as investors weigh the implications of the spread of artificial intelligence. Chip makers have seen their stocks surge: The VanEck Semiconductor exchange-traded fund is up 38% in the past six months because the data centers the Big Tech services companies are building require more hardware.
But shares of some of the companies making those giant investments have plummeted. Microsoft, for example, is down 23% in the past six months because the market isn't convinced the return on that spending will be high enough.
Other software names, and even financial services stocks, have dropped as well, responding to concern that AI could damage their business models. Investors are worried that tools created by privately held Anthropic and OpenAI could aid businesses in using their data more efficiently, or even help people manage their money, access loans, and buy insurance.
Mining stocks have benefited from the fact that data centers require more wire and other metallic products, sending metals prices higher. Freeport-McMoRan stock is up 45% in the past six months. The list of enormous moves goes on.
The big picture is that while stocks often move closer to in unison — the majority often rise or fall at the same time to varying degrees — that isn't happening right now. The correlation among U.S. stocks has been below 20% for the past two months, according to Citi strategists, putting it in the ninth percentile for the past 20 years.
A major reason is that the market is trying to discern which companies will emerge as long-term AI winners and which will ultimately see the technology devastate their profits. Investors are selling first and asking questions later, so many stocks that shouldn't get crushed are taking hits.
Those are the ones to buy. It's a funny moment in the market because while everyone knows there are lots of stocks that have fallen too far, it is difficult to identify them.
"Generally, when correlations are low, we tell clients that stock-picking is the best way to generate alpha," or outsize returns, says Kevin Brocks, 22V Research's director of portfolio strategy.
Barron's has worked to identify beaten-down stocks with the potential to provide large gains as they recover. Cybersecurity stocks are in that group.
Palo Alto Networks, CrowdStrike, Cloudflare, Zscaler, and Fortinet have all seen periods of double-digit declines in the past six months, simply because they are software companies and the market is worried about software. But cybersecurity software could easily prove to be an area where Anthropic and OpenAI can't easily compete.
The existing players in cybersecurity provide businesses with complex firewalls: software that identifies customers' internal users of data, and tools that allow or disallow access to information for parties external to the customer. It could take more than just a couple of years before Anthropic's and OpenAI's AI models are able to do the same thing, even if they try. And there is no certainty they will prioritize creating their own cybersecurity tools.
"Cybersecurity is another level where I don't think anybody [competitors] is going to make huge headway in the next year — year and a half," says Luke Rahbari, portfolio manager of the Rational Equity Armor Fund. "I haven't heard of these AI systems coming up with cybersecurity."
That isn't a unique opinion. Mizuho analyst Gregg Moskowitz says cybersecurity companies might be the most resilient to the AI threat of all the sub-businesses within software.
That makes these five large cyber stocks look attractive. Expectations for their aggregate 2026 earnings have barely budged since worry about AI hit the stocks this year. But their stock prices have fallen, making the shares cheaper relative to expectations for profit.
Take Palo Alto. The stock is selling for 39 times the earnings expected over the next 12 months, down from 56 times when it hit its record high in October. If the company maintains its current rapid earnings growth, not just in the next few quarters but beyond the next year or so, the market will assume the AI threat isn't materializing. That, plus higher earnings, would boost the stock.
The many financial companies that are using AI to their advantage are another basketful of potential bargains. AI won't necessarily edge banks and insurers out of their roles in the economy.
It's time to look for opportunities, as well as AI victims.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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