It’s time for investors to consider taking profits in some high-flying artificial intelligence names, according to Citi. Excitement around the theme has crept into its second calendar year, propping up the broader market. The value of AI linchpin Nvidia has more than doubled year to date, while Super Micro Computer has tripled. But analyst Drew Pettit sees some risks ahead. Sell-side estimates expect stocks exposed to AI to grow free cash flows above 25% annually over the next five years, but the market implies 19% to 27% growth, he said. “While, in aggregate, the group looks like it can meet high expectations, nearly 60% of the market cap weight of the basket have longer-term sell-side estimates that lie below what markets are pricing in for growth,” he said, which could be cause for concern if companies fail to continue topping and raising estimates. “This setup in our backtest often comes with significantly more volatility,” he added. Given this backdrop, Pettit recommends investors take profits in popular AI names — most notably the enabler stocks like semiconductors — and allocate funds “across the theme’s value chain.” For those with a “more bearish take,” the firm is offering up some negative correlated stocks to hedge if the theme comes under pressure. MCD YTD mountain Shares this year Several popular consumer staples stocks are in the basket, including Kraft Heinz and J.M. Smucker . Both stocks have struggled this year, falling more than 13% each. Fast-food giant McDonald’s also made the cut, with shares down more than 17% since the start of 2024. Biopharmaceutical stock Gilead Sciences also met the criteria for the basket. The company made headlines last month when its twice-yearly experimental medicine to prevent HIV succeeded in a late-stage trial . Hartford Financial Services Group is the most negatively correlated stock in the basket, with shares up 25% this year. Several other insurance names made the list, including Chubb and Allstate . Other stocks include Honeywell and Exxon Mobil . Correction: Drew Pettit is an analyst at Citi. An earlier version misspelled his name.
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