This growth portfolio looks far beyond ‘Magnificent Seven' stocks to profit from AI

Daniel Kim of Saturna Capital, co-manager of the five-star rated Saturna International Fund, identifies a "Great Bifurcation" where the corporate-enterprise sector is experiencing significant AI-driven profit margin expansion, contrasting with weakness in the consumer credit and labor markets. His investment strategy focuses on identifying "undiscovered inflecting blue-chip stories" primarily in international markets, deliberately avoiding the highly concentrated "Magnificent Seven" stocks, which he views as cyclical. Kim emphasizes companies like Broadcom, Fujikura, and Teradyne that are critical to AI infrastructure but are often overlooked, seeking a substantial delta between market perception and underlying reality to capitalize on the early stages of AI rollout and continued corporate profitability growth.

Analysis

Daniel Kim of Saturna Capital identifies an AI-driven "Great Bifurcation," where the corporate-enterprise sector shows significant profit margin expansion, contrasting with consumer market weakness. S&P 500 operating margins improved 58 basis points to 29.58% over 12 months, with the IT sector up 186 basis points to 39.40%, reflecting "staggering efficiency and productivity gains" expected to accelerate despite AI-related layoffs and "cracks" in consumer credit.

The S&P 500's concentration in 10 companies, including the "Magnificent Seven," is 40%, with Nvidia alone comprising 8.6% of SPY, which Kim views as a cyclical business. This high concentration underscores a potential risk for broad index investors.

Saturna International Fund employs a "non-[Magnificent Seven] global-growth portfolio" strategy, targeting "undiscovered inflecting blue-chip stories" in international markets. The fund seeks companies like Broadcom (8.7% weighting), Fujikura (7.9% weighting, 35% optical fiber market share), and Teradyne, which are critical to AI infrastructure. Fujikura's sales are projected to grow at a 10% CAGR with EPS at 25.3% from 2025-2027, significantly outpacing the S&P 500's expected 6.5% sales and 13.9% EPS growth.

The five-star Morningstar-rated fund's Investor shares ranked second for 10-year average annual return among 123 peers, delivering 10.3% versus the MSCI EAFE ETF's 8.2%. This suggests the differentiated strategy of focusing on overlooked global AI enablers has historically generated competitive returns.

Key Decisions for Investors

• Consider diversifying beyond highly concentrated U.S. large-cap indices, particularly given the "Magnificent Seven" dominance and potential cyclicality of key AI players like Nvidia.
• Evaluate international markets and "undiscovered inflecting blue-chip stories" in the AI infrastructure supply chain, as highlighted by Saturna Capital's strategy and specific examples like Fujikura and Teradyne.
• Monitor the divergence between corporate profitability and consumer market health, as sustained weakness in the latter could eventually impact broader economic growth and corporate earnings.
• Explore actively managed global growth funds with a proven track record, such as the Saturna International Fund, which has demonstrated competitive long-term returns by identifying overlooked opportunities.