Worried about the AI trade faltering? Look at these stocks, Trivariate says

Amid a recent investor pullback in AI-related stocks due to valuation concerns, Trivariate Research suggests diversifying portfolios with non-AI companies demonstrating strong performance and low correlation to the AI sector. Examples highlighted include Johnson & Johnson, up 25.6% YTD driven by strategic investments; Paramount Skydance, up 86% YTD following its merger and restructuring efforts; and CVS, up 68.3% YTD due to aggressive cost-cutting measures and operational adjustments.

Analysis

Investors are exhibiting increased caution towards the artificial intelligence sector, driven by concerns over high valuations. This sentiment materialized in a recent pullback, with the tech-focused Nasdaq Composite declining 0.7% and key AI-related stocks such as Oracle, Micron, Broadcom, and C3.ai falling between 1.5% and 5% in the week ending September 26. In response to this cooling confidence, Trivariate Research has identified a strategy for portfolio protection by focusing on non-AI-related equities. Their methodology screens for non-technology companies with a low correlation (0.2 or less) to an AI semiconductor basket and strong momentum, defined as a minimum 10% price increase over the last six months. Specific examples of this strategy include Johnson & Johnson, which is up 25.6% this year following the announcement of a $55 billion, four-year investment in U.S. manufacturing and R&D. In the media sector, Paramount Skydance has rallied 86% year-to-date, benefiting from post-merger restructuring that included a 3% workforce reduction and a potential acquisition of Warner Bros. Discovery. Similarly, retail giant CVS has seen its shares jump 68.3% year-to-date, fueled by aggressive cost-cutting measures such as shuttering over 270 stores and downsizing its insurance division.

Key Decisions for Investors

• Investors with significant exposure to the AI sector should re-evaluate their positions given the recent pullback and mounting valuation concerns, potentially trimming overweight holdings to manage risk.
• Consider diversifying portfolios with non-technology equities that exhibit low correlation to the AI sector and possess strong, independent fundamental drivers, as highlighted by Trivariate Research's strategy.
• Monitor specific catalysts in fundamentally-driven companies like Johnson & Johnson's execution of its investment plan, Paramount Skydance's M&A activity, and the ongoing impact of CVS's cost-cutting program, as these factors are currently driving significant outperformance.