Nvidia is an 'easy match' for AI investors: Strategist

The AI trade continues to gain momentum, prompting investors to explore opportunities beyond Nvidia (NVDA). However, identifying promising stocks has proven challenging. Citi head of equity trading strategy Stuart Kaiser joins Catalysts to share his insights on the AI trade.

Kaiser describes Nvidia's position in the AI trade as an "easy match," noting that some investors purchase this name to "buy the stocks that are like the pipes of the [AI] system." Despite Nvidia experiencing a significant sell-off as investors sought to diversify their portfolios, Kaiser observes, "People said, you know what, let me just go back to the clean and easy AI trade and not try to get cute with these other things."

Addressing concerns about tech concentration in markets, Kaiser explains, "This is kind of how equity markets behave. Over any 12-month period, you're gonna have forty to fifty percent of returns come from just ten stocks." He further elaborates on market dynamics, stating, "There's a theme, a trend, a shift going on in the markets that tend to favor these winners. Momentum does well in those stocks."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Angel Smith

Video transcript

Video shares Bopping around this morning, we saw a brief sell off earlier in the week.

A little bit of downward pressure earlier today.

Now that stock moving back to the upside All that movement highlighting the anxiety behind the A I rally.

So how should investors be positioning amidst that uncertainty joining us?

Now we've got ST Kaiser City head of equity trading strategy.

You were great to have you in person.

Thanks for being here.

So, NVIDIA, we got to talk about it first, bopping around a lot this morning.

What is the central thesis that investors need to be focused on when it comes to the NVIDIA trade?

I mean, I think when people are grab it to towards NVIDIA, it's I think the logic is I believe in the A I theme.

I'm not sure who the winners and losers are going to be, so I need to buy the stocks that are like the pipes of the system, essentially.

So no matter who wins at a I, they need these higher.

And that makes a I and NVIDIA kind of an easy match.

You might throw Microsoft in that in that pile as well.

Just because they're able to demonstrate revenue kind of related to a I.

But you know, this actually harkens back to even the crypto period when you might not believe in Bitcoin or you may believe in Bitcoin.

But, you know, people need higher end chips and servers to deal with Bitcoin so you can invest in the pipe.

So that kind of taking a view on the theme itself has anything changed in the narrative?

I mean, I think the the the NVIDIA narrative, the narrative, I think Yes, I think on NVIDIA's evaluation discussion, um, valuation has gotten high.

You've also had this series of very large beats versus consensus.

So there's some concern that you get kind of long in the tooth.

And where does that go on the A?

I the more broadly, I think, coming into the year, people wanted to broaden out that theme.

You know, they want to go beyond a video either to other semi stocks or to software A I or even into power generation and kind of play those next two or three levels.

Unfortunately, by and large, that stuff hasn't worked that great, and there's been a lot of single stock risk around it.

And I think what you're probably seeing in the last couple of days is the video sold off a bit and people said, You know what?

Let me just go back to the the clean and easy A I trade and not try to get cute with these other things.

So does that mean that investors are seeing more returns when they invest broadly with something like the QQQ versus trying to stock pick in the A I space?

You know, that's been our impression.

We have a list of about 35 a IA I winners, so to speak.

Only 13 of those stocks are up here to date, so it's been hard to kind of pick the winners.

And even beyond that, there's eight stocks in that basket that are down 25 percent.

So not only has it been hard to pick stocks, but if you've been wrong, you've kind of been been really wrong, so kind of diversifying.

The A I theme hasn't worked as well as just being long queues or being long NVIDIA and kind of the known winners, even though the valuation has gotten a little challenging.

Stuart, I'm curious what you make of the concentration debate.

There has been much said about Hey, this is a huge risk in the market.

The fact that there's only a handful of stocks that's really driving much of the momentum and then many have kind of taken a step back when you have your peers on the street and you include and just kind of evaluated kind of what we have seen in the past and maybe what that could signal.

So is it a risk to the broader market?

Or maybe have some of those fears been overblown?

I mean, it's a little bit of a risk, just in the sense that you know, a lot of the returns have come from a small number of stocks.

So either those stocks need to keep performing or you need a significant broadening out.

But to your point, if you look back, historically, this is kind of how equity markets behave.

You know, over any 12 month period you're gonna have 40 to 50% of returns come from just 10 stocks.

So there's a a theme, a trend, Um, you know, a shift going on in the markets that tends to favour these winners.

Momentum does well, and those stocks do well.

I think the last 12 months has been obviously a little a little more than 40 or 50% and that's got some people concerned.

So it worries you a bit, Um, but again, it's not unprecedented, So I think we're trying to be a little more balanced about it.

Last year, our takeaway was.

The reason you have concentration at price returns is because you had concentration and earnings growth.

There just wasn't a lot of companies and sectors generating earnings, so people gravitated towards them that drove narrow leadership.

We expected that to broaden out a bit.

This year.

It sort of trick down.

It hasn't really broadened out.

We're hoping that it will ultimately happen later in the year, But yet it's been It's been fits and starts on that side of things.

Given that, what differences are you seeing in how kind of institutional hedge fund investment is positioning for a potential broadening out versus retail investors retail?

It's a little hard to say because they tend to be more single stock pickers.

Our view on broadening out was just to go to S and P 500 equal weight.

So you're kind of broadening out a bit.

But you're still, say, staying in that larger cap kind of investment grade type cohort and not go all the way down to that Russell 2000 small cap.

And the logic for that was that Russell has a lot of growth and interest rate risk that you don't need to take on right now.

You can just go down to S and P equal weight and do that.

And I think if you look at how Mars and performing, I think institutions are generally doing that.

Yeah, they're broadening out, but they're broadening out very selectively.

They still want to be in a stock that if we do get this long awaited recession, or if the Fed does stay higher for longer, they're not too exposed.

So I think that's why it's been a trickle down.

People are being very methodical about kind of how they move down the cap structure, and they're not generally doing it into into lower quality stocks.

I guess you'd say