We recently made a list of UBS’ Bottom Quant Stocks In AI, IT, Healthcare & Others: 29 Stocks In All Sectors. In this piece, we will look at where A. O. Smith Corporation (NYSE:AOS) ranks on the list of UBS’ bottom quant stocks.
With November 2024 having settled in and the US presidential election in its final stages, investors are also digesting the results of the latest earnings season. As had been the case for the first and second-quarter earnings season, Q3 was also focused on artificial intelligence. While Wall Street’s AI GPU darling, the firm whose shares are up an unbelievable 206% over the past twelve months, is yet to report its earnings, other consequential firms have got the ball rolling.
Two of these are among the most important players in the software segment of the AI industry. The first is known for its tightly-knit relationship with the firm behind ChatGPT, OpenAI. The second is the world’s largest social media company that has made waves in the AI industry with its open-source Llama AI foundational AI model. Starting from the former, its ability to generate AI profits primarily through its cloud computing division is baked into the narrative.
Since its earnings report, the shares are down by 4.9%. This is even though the firm’s revenue and earnings per share of $65.59 billion and $3.30 beat analyst estimates of $64.51 billion and $3.10. Along with the earnings and revenue beat, the software company’s Azure cloud computing business which also includes its enterprise-focused AI services grew by 33% annually or 34% on a constant currency basis. These also beat analyst estimates, so on the surface, one would expect the shares to rise.
However, Wall Street isn’t always focused on current performance, and for AI stocks, their narratives are built on future expectations. These expectations are priced into the stocks. For the software company, its weak guidance is at the center of the poor share price performance as the current quarter revenue guidance of $68.1 billion to $69.1 billion missed Wall Street estimates of $69.83 billion by more than half a billion dollars.
The software company was joined by the social media firm to report its earnings on the same day. The Facebook parent’s shares are also down since the earnings report as they have lost 3.3% after recovering from the bottom of a 5.3% loss. Its earnings report, like the post-report stock performance, also mirrors the software company’s results to an extent. For starters, the social media firm also beat analyst revenue and EPS estimates. It posted $40.59 billion in revenue and $6.03 in earnings per share to beat analyst estimates of $40.29 billion and $5.25. Driving the beat was higher advertising revenue which grew by 18.7% annually to sit at $39.9 billion.
However, while the firm’s net income jumped by 35% to touch $15.7 billion, it was the slowest growth in over a year. Additionally, the firm reported that it had 3.29 billion active daily users during the third quarter, which was lower than the 3.31 billion in analyst estimates. Another factor that didn’t impress investors was its AI-driven capital expenditure. The firm raised the lower end of its full-year capital expenditure to $38 billion from $37 billion and kept the high end intact at $40 billion. Higher expenditures increase the return that investors expect and reduce payouts in the form of dividends and share buybacks. Consequently, the stock tumbled after the earnings report.
These two AI-driven earnings reports are part of a market that is now facing lower rates, higher growths, and the culmination of a bitterly fought presidential election. In a recent report, investment bank UBS took an optimistic view of the US stock market. It noted that from “a macro perspective, the combination of slowing but durable economic growth, healthy earnings growth, and continued Fed rate cuts is supportive.” The bank is also optimistic about AI and particularly about the broader category of firms apart from the GPU designer that has seen most of the share price gains so far.
In its report, it notes that “AI-related companies that span semiconductors, cloud service providers, devices, and data centers account for over one-third of the S&P 500 by market cap. We expect continued growth in AI investment spending to drive revenues and profits.” However, according to UBS, AI is not the only lucrative stock market sector offered by the US stock market. The bank adds that the “S&P 500 also offers exposure to secular growth in longevity through various US medical device companies. Many US companies are also playing leading roles in the energy transition via electric vehicles, renewables, and energy efficiency.”
On the topic of interest rate cuts, the report outlines that “50bps cuts at similar labor market conditions as today have historically been positive for equities.” These labor conditions are determined by the 3-month average for US nonfarm payrolls, and UBS also believes that rate cuts by the Federal Reserve can reverberate across global markets. It notes that “Historically, Fed rate cuts of more than 50bps when the market was within 1% of all-time highs have been rare. It only happened during the Volcker era in the mid 1980s. The S&P 500 rallied more than 20% in the 12 months following the jumbo cuts. Also, Fed rate cuts tend to reverberate positively across global equity markets, with Asia ex-Japan and emerging markets as the primary beneficiaries outside the US.”
Finally, with the 2024 US Presidential Election over, the bank’s report released ahead of the election also commented on the outcomes on Wall Street. It shared that “elections are a short-term risk; for instance, if former President Donald Trump is elected, markets may quickly price potential tariffs. However, we would see dips as buying opportunities and recommend gradually phasing in equity exposure.”
Our Methodology
To make our list of UBS stocks with improving quantitative indicators, we chose the firm’s top stocks that are seeing improvements in EPS growth, P/E ratio, and other indicators. Stocks within each sector were ranked by the number of hedge funds that had bought the shares during Q2 2024. The sectors themselves were ranked by the cumulative number of funds that had been invested in the firms in descending order.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A graph plotting the trends and performance of stocks on the public equity markets.
A. O. Smith Corporation (NYSE:AOS)
Number of Hedge Fund Investors In Q2 2024: 33
Sector: Industrial
A. O. Smith Corporation (NYSE:AOS) is a specialty industrial products firm that makes and sells boilers, water heaters, and associated products. Roughly 97% of its sales come from China and North America, with China accounting for 21% and North America 78%. Consequently, while A. O. Smith Corporation (NYSE:AOS) benefits from a differentiated business model which makes it one of the top players in its industry, the stock is muted when it comes to growth. This is also evident in its revenue, with sales growing by a hairline of 2.6% between 2022 and 2023. It also means that A. O. Smith Corporation (NYSE:AOS) has few avenues to disrupt its industry, and consequently, it has to rely on shipping high volumes and maintaining economies of scale to drive profitability. The firm benefits from stable management hands which is evident by the fact that it has been in business for more than a century.
A. O. Smith Corporation (NYSE:AOS)’s management shared details about its long-term growth strategy during the Q3 2024 earnings call:
“As we have discussed earlier this year, we commenced several expansion projects in 2024 to support our long-term growth strategy. We recently celebrated the grand opening of our new facility on our campus in Juárez where we will manufacture gas tankless water heaters for North America. While there is still startup work to be completed, production is expected to begin in early 2025 with the ramp up through the year. We have also added additional heat pump capacity on the same site in support of increased demand for our residential heat pump water heaters. Also, we have made progress on our new state of the art commercial product development center, which is located on the same site as our Lebanon, Tennessee facility. This expanded facility, which is projected to be completed in mid-2025, will enhance our product development and testing capabilities and knowledge sharing by bringing together our commercial water heater and boiler engineering teams.”
Overall, AOS ranks 12th on our list of UBS’ bottom quant stocks in AI, IT, healthcare & other sectors. While we acknowledge the potential of AOS as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AOS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.