It's time to buy the next leg of the AI story. Think global, says Citi, offering these stock picks.

By Barbara Kollmeyer

Critical information for the U.S. trading day

"No rush."

That was Federal Reserve Gov. Chris Waller pounding the table over the need for patience on interest rate cuts in a much-anticipated speech on Wednesday night.

Some described that as a "hawkish sledgehammer," after hopeful signals from Fed ChairJerome Powell a week ago, and that could make for a rough final trading session of the month Thursday.

Rain on the rate-cut parade comes as red flag warnings pop up across Wall Street over momentum stocks like artificial intelligence darling Nvidia (NVDA) which has been in the winner's circle and an S&P 500 index driver in the past year or more.

But by now, investors know that even if AI is in a frenzy right now, the theme is here to stay. And our call of the day from a team of Citigroup strategists led by Drew Pettit say it's "time to buy the next leg of the artificial intelligence trade."

Firstly, more caution. They warn of "micro bubble risks," due to sharp gains in certain pockets of the market, thus "investors should be discerning within the theme, especially for core holdings."

They stress that investors have been overlooking lots of international names for U.S. stocks, even if the latter has been driving AI year-to-date returns. Their deep dive found "more stocks are contributing to performance upside, and expectations are for earnings growth to be better distributed across the AI value chain in the years ahead."

Pettit and his team say now is "timely" for growth and value investors to broaden exposure, especially given the dilemmas they each face. For example, growth fans have to figure out what to do with stocks that have seen hefty gains.

"Conversely, their bearish counterparts may be worried about bubble risks in highfliers, like we saw in the unwinding of lower-quality U.S. names in 2022, even though they see structural gains for the theme longer term," said Pettit and his team.

And value managers struggle with the largely growth-focused AI landscape, though by broadening out the theme, "pockets of value" can be found, says Citi. "The key is looking for names where AI exposures aligns with improving fundamentals."

So their advice for growth investors is to take the "AI-at-a-reasonable-price approach," while value investors should look at lower-multiple, or potential undervalued names where margins should expand.

"The end results provide broader regional and value chain exposure, lower beta relative to tech-heavy indices, and more attainable implicit fundamental expectations."

As for the names flagged by Citi, they break down the stocks mapped out to AI through value chains - enablers, creators and users - offering two screens.

The first screen is the AI at a reasonable price basket. For example, on the creators list they flag AppLovin (APP), Okta (OKTA), BILL Holdings (BILL) and Smartsheet (SMAR) in the U.S., Wix.com (WIX) and Autoliv (ALV) in Europe and Japan's Trend Micro (JP:4704). Enablers: Intel (INTC), Marvell (MRVL), Broadcom (AVGO), Zillow (Z) and TE Connectivitiy (TEL) in the U.S., BE Semiconductors (NL:BESI) in Europe and Australia's Goodman Group (AU:GMG). Users: Block, Veeva Systems Expedia Mastercard in the U.S., Thales, Europe's Airbus and ABB and Japan's Nidec and Panasonic.

For the AI value basket, in the creator segment they like U.S.-based Aptiv (APTV), DocuSign (DOCU), Electronic Arts (EA), France's Capgemeni (FR:CAP) and Japan's Toyota (JP:7203) (TM). On the enabler list - HP (HPQ), SS&C Technologies (SSNC) and NetApp (NTAP) in the U.S., Orange (FR:ORA), Royal KPN (NL:KPN) and Hexagon (SE:HEXA.B) in Europe and Canon (JP:7751) and Japan's Nippon Telegraph and Telephone (JP:9432). Users: Bank of New York Mellon (BK), Bank of America (BAC), Booking Holdings (BKNG) in the U.S., Siemens (XE:SIE), Airbus (FR:AIR), Zurich Insurance (CH:ZURN) in Europe and Japan's Nitto Denko (JP:6988).

Markets

U.S. stocks SPX COMP are steady as benchmark Treasury yields BX:TMUBMUSD10Y rise. The dollar DXY was up, along with oil prices (CL.1) and gold (GC00) was higher at around $2,226 an ounce.

U.S. bond markets will close Thursday at 2 p.m. ET ahead of the Easter break, with U.S. equity and bond markets - and many others across the world - shut all day Friday.

The buzz

U.S. weekly initial jobless benefit claims fell slightly to 210,000,showing a still robust labor market, while fourth-quarter GDP was revised up to 3.4% from 3.2% for the final quarter of 2023. Pending home sales inched in up February, Chicago business activity weakened for a fourth-straight month and a final University of Michigan consumer confidence index was revised down slightly.

Given Friday's holiday, most dealing desks will be empty when the personal consumption expenditure price index, the Federal Reserve's favored inflation gauge, is published at 8:30 a.m. ET and when Fed Chair Powell makes comments at 11:30 a.m.

Home Deport (HD) announced an $18.25 billion deal for SRS Distribution Inc. a residential specialty trade distribution company.

Restoration Hardware (RH) is climbing after the luxury furniture chain forecast a demand pickup after "the most challenging housing market in three decades."

Keysight Technologies (KEYS) made a $1.47 billion offer for U.K.-based cybersecurity group Spirent (UK:SPT), trumping Viavi Solutions (VIAV).

Less than $5 a month would profitably produce the Ozempic weight-loss/diabetes drug, says a new study.

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The chart

Retail investors have been buying fewer stocks, but leverage use has been picking up in recent weeks, according to Marco Iachini and Lucas Mantle of Vanda Research.

One reason that might be happening is that retailer portfolios are "now back in the money," they say. "It took slightly more than two years, but the average retail portfolio is no longer in the red - thank you, NVDA. As the focus shifts from recouping losses to making new highs, retail's willingness to take on more risk has clearly increased," said Iachini and Mantle.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   DJT     Trump Media & Technology Group 
   CGC     Canopy Growth 
   RDDT    Reddit 
   AAPL    Apple 
   NIO     Nio 
   MSTR    MicroStrategy 
   SMCI    Super Micro Computer 

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-Barbara Kollmeyer

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03-28-24 1022ET

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