A Great Lesson in Artificial Intelligence Investing

Artificial Intelligence (AI) is captivating investors. Many are calling it bigger than the internet. There is an analyst at Goldman, Sachs who has called it out the industry negatively, Jim Covello, who is their Head of Global Equity Research. Of course, there are plenty of bulls on Wall Street, even at Goldman, Sachs.

I am not going to weigh in on AI, but I do want to discuss that you are probably an investor in it if you invest in index funds like SPDR S&P 500 ETF (SPY) or Invesco QQQ Trust (QQQ). Why? The big AI stocks in them!

I shared a piece early on March 5th, warning my readers to get out of two stocks, NVIDIA (NVDA) and Super Micro (SMCI). Both of these stocks are tied to AI. NVDA has gone up a lot, though perhaps the top is in, while SMCI has plunged. Since the article was written, it has lost more than 62%, while QQQ has gained more than 10% since then:

I had warned in that article that SMCI was dicey. Well, I reported when Hindenburg Research published a short report in late August, which caused the stock to drop. It had dropped a lot on the prior day, but it was below $500 the morning I shared that report because the company announced that it would be late on filing its 10-K, which it still has not filed!

Yesterday, the Wall Street Journal reported that the Department of Justice was probing the company. The stock fell on the day by 12.2%, making a new low since the article I shared in early March. This morning, it is trading above the low that was set yesterday but below $400 ($396). Here is the one-year chart:

The stock has left two trading gaps above, and it is down a lot from its all-time high, but it is still above where it ended at year-end (the blue line). Plus, there is an open gap in trading below the current price from January.

The stock may "look" cheap to certain metrics, but I continue to be very cautious on this name for technical reasons as well as the potential fraud. This stock, despite its big decline recently, still trades more than 20X where it traded 5 years ago.

AI is very interesting, and it has become a big theme with investors when the rest of the economy seems to be softening. The big lesson here is that investors need to make sure they understand the stocks in which they are investing. Being tied to a hot trend is not enough!