Warren Buffett is often hailed as one of the greatest investors, with a track record that has consistently outpaced the broader markets. Could artificial intelligence (AI) emulate his success? I recently discovered an intriguing AI model called the “Buffett Bot” that was trained to mimic Warren Buffett.
As AI continues making strides across industries, it’s no surprise some clever developers have aimed these analytical engines at the financial markets. And basing one on the Oracle of Omaha himself seems like an especially smart play. Of course, this AI isn’t the real Buffett, but it offers a fascinating glimpse into how modern data science attempts to replicate legendary investors.
I’ll be taking a look at the stock picks recently put forward by this Buffett-inspired AI. The model imitates Buffett’s penchant for finding strong yet reasonably-valued businesses. It will be intriguing to see what kind of companies and sectors the Buffett Bot highlights as solid investments. While this AI is unlikely to fully capture the depth of real-world experience and nuanced judgment behind Buffett’s brilliance, it may still surface some appealing prospects. At the very least, its selections should provide thoughtful food for thought.
Moody’s (MCO)
Moody’s (NYSE:MCO) holds an enormously influential position in global finance as one of the “Big Three” credit ratings agencies alongside S&P (NYSE:SPGI) and Fitch. This oligopoly enjoys durable competitive advantages from high barriers to entry and a sticky customer base. Thus, I’m not surprised to see Buffett Bot tap Moody’s as a smart Buffett-style bet.
After all, the real Buffett also knows a thing or two about this industry leader – MCO occupies a sizable 2.6% allocation in Berkshire Hathaway’s (NYSE:BRK-B) portfolio. For a man with a highly concentrated portfolio anchored by Apple (NASDAQ:AAPL), carving out such a large niche for Moody’s signals conviction in its prospects.
And why shouldn’t Buffett have this conviction? Moody’s just delivered another quarter of impressive growth in Q3 2023. Revenue grew 15% year-over-year, powered by strong performance across ratings and research, data and analytics, and M&A. Meanwhile, the company’s EBITDA leapt 32%.
No doubt, Moody’s trades at a steep premium. Its shares currently command a valuation of roughly 12-times forward sales and 39-times forward earnings. However, the company’s growth prospects support these rich valuations. Analysts forecast annual earnings per share growth of around 15% over the next five years on the back of near double-digit revenue expansion. In an entrenched triopoly that’s strategically expanding its presence across high-margin adjacencies, I believe Moody’s warrants its above-average multiple.
As an added bonus: Moody’s pays out a small but growing dividend that yields 0.8%. Moody’s offers compelling total return potential as a Buffett-approved blue-chip with fortress positioning in an essential global industry. I agree with the Oracle and his digital doppelgänger that this is a long-term winner.
Brookfield Asset Management (BAM)
While not currently a Berkshire holding, Brookfield Asset Management (NYSE:BAM) aligns nicely with the Buffett school of thought. This alternative asset manager focuses on real assets like infrastructure, real estate, renewables, and private equity – tangible categories that benefit society. Its value-based approach centers on acquiring high-quality assets during times of distress or dislocation to generate strong risk-adjusted returns.
In other words, Brookfield brings a long-term lens to its investing framework, and is backed by a strong balance sheet – key “Buffettesque” principles. So, I understand why a digital version of the Oracle tapped Brookfield as an intriguing pick. As attention pivots toward renewable energy and infrastructure spending while real estate rebounds from pandemic lows, this is a company with plenty of tailwinds to consider.
The company’s growth forecasts look promising, too. Brookfield anticipates 17% annualized sales growth over the next two years alongside 19% earnings growth in 2025. While its forward price-earnings ratio of 26-times based on estimated 2024 earnings seems somewhat rich, I believe this premium makes sense for a company eyeing high-teens bottom-line boosts. Plus, shareholders get paid to wait via a 3.2% dividend yield that should keep growing.
I agree with Buffett Bot that BAM stock warrants a spot in a long-term-focused portfolio.
Amazon (AMZN)
It’s no secret that Buffett largely missed the boat on new tech like AI over the years. But the small Amazon (NASDAQ:AMZN) position (recently trimmed) in Berkshire’s portfolio proves that even old dogs can learn some new tricks. And while Buffett may not be ready to fully embrace fast-moving tech disruptors, his digital descendant shows more enthusiasm in tapping Amazon’s immense potential.
Now, AMZN stock trades at a nosebleed valuation. Shares of the e-commerce giant currently trade for more than 82-times trailing earnings. But when you dominate the secular growth engines of e-commerce and cloud like Amazon does, lofty multiples feel warranted. Remember, AWS alone commands a 41.5% market share in the cloud, greater than Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG, NASDAQ:GOOGL), and IBM (NYSE:IBM) combined!
Meanwhile, early pandemic aftershocks to the e-commerce sector have settled, paving the way for growth re-acceleration. Over the last three years, Amazon’s net sales grew outpaced over 84% of marketwide peers. And though its price-earnings ratio seems extremely rich for a company of this scale, it falls below Amazon’s 5-year average near 120-times.
On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.