Artificial intelligence (AI) platforms like ChatGPT are already as ‘clever’ (in some ways) as the most intelligent human beings. You think this would make them rather good at picking stocks from the FTSE 100.
Having asked ChatGPT to name the best FTSE 100 stock to invest in, I was pleased to see it started by offering me some sensible financial advice.
The AI platform said: “Please note that past performance does not guarantee future results. It’s advisable to consult with a financial advisor to ensure these investments align with your personal financial situation and objectives.” It added that the FTSE 100 offers exposure to a range of UK companies.
Ok, not a great start
Although I only asked for one stock, the AI platform gave me five companies. This included Rolls-Royce (LSE:RR), NatWest, Barclays, Antofagasta, and Darktrace. That’s not a great start as Darktrace is no longer listed on the UK exchange having been acquired by Thoma Bravo in October 2024. This mistake does make me question ChatGPT’s competence. Darktrace isn’t even a bad pick, it’s simply an impossible pick!
However, I pushed further and asked it for the single best stock on the index. It responded with Rolls-Royce, saying: “The company’s strong performance, driven by a recovery in the aviation sector and increased military spending, has led to a share price surge of over 95% in 2024. Its position as a leader in aerospace and defence, combined with ongoing market recovery trends, offers significant growth potential.”
It went on to highlight a strong recovery in the aviation sector, cost-cutting initiatives as well as some discourse about the debt burden. In fact, it noted ongoing efforts to reduce the burden and suggested debt posed one of the biggest risks to the business.
Is it a good pick?
Personally, I still like Rolls-Royce as an investment opportunity, but I’m not convinced by the reasoning provided by ChatGPT. I’d argue that it’s the company’s valuation metrics — admittedly driven by trends in aviation, defence, and power systems — that make this company an interesting investment opportunity.
The stock is currently trading at 33 times forward earnings. But given very impressive growth forecasts, the company’s price-to-earnings-to-growth (PEG) ratio stands at just 1.1. Given the barriers to entry in sectors like aviation engines and defence, coupled with strong profitability grades, I’d suggest this PEG ratio is very attractive. One of its few peers, GE Aerospace, trades with a PEG of 1.3.
I’d also disagree with ChatGPT’s concerns about Rolls-Royce’s debt. Three years ago, debt was an issue. But now net debt stands around £800m. That’s pretty immaterial for a company with a market cap of £50bn.
Instead, as a risk factor, I’d point to the impact of inflation on production costs and the susceptibility of the aviation industry to deep downturns, as we saw during the pandemic. Outbreaks (like another respiratory illness, HMPV, in China) if serious enough could derail the upturn in civil aviation.
I hold Rolls-Royce shares, and have considering buying more in the past. However, given the recent share price appreciation, I believe I already have significant exposure to it. I probably won’t buy more at the moment.
This post was originally published on Motley Fool
