How to Invest in the AI Boom
The dot com bubble of the late 1990s stemmed from the tremendous capital expenditures for laying fiber-optic cable in anticipation of the need from the country’s new internet. It wasn’t a mistake to make the investments. However, the problem was that the demand and profits did not come soon enough to realize adequate profits. Most went bankrupt, sending their inflated stocks crashing. The installed fiber was sold for pennies on the dollar to a new generation of companies who profited from what became today’s robust internet. This scenario is the primary risk of investing in the current AI boom.
AI Boom versus the Dot Com Bubble
The leading AI companies are making tremendous capital expenditures (cap-ex) for data centers and related infrastructure. Amounts are now approaching trillions. The eventual demand and profits are widely considered to be great, but the timing and amount is merely conjecture. Nearly all of the stocks of the companies making these large capital expenditures are inflated and present high risk. Not all of them will be the eventual winners.
Compression Investing
Rather than assuming a high level of risk, a more prudent approach is to consider the companies using “AI Compression” technology which makes AI intelligence models cheaper to run by reducing necessary computing and memory capacity, thereby reducing hardware needs and demand for power.
The three main compression approaches are quantization, pruning, and knowledge distillation. Quantization reduces memory needs by changing the format in which data is stored. Using INT4 format instead of FP16 reduces the memory needed by 75 percent. Pruning removes unnecessary parameters that waste computing energy. Distillation teaches smaller “student” AI models to manage less demanding queries.
A 2026 comparative study found quantization currently offers perhaps the best overall tradeoff between performance retention and efficiency, while distillation can deliver strong runtime acceleration (arXiv).
The DeepSeek Disruption
In January 2025, a little-known Chinese company called DeepSeek burst into the headlines announcing it can run AI much more efficiently and reduce the equipment and power needed for AI. The announcement rattled US stocks whose companies were beginning to invest heavily in data centers, expensive chips, and related infrastructures. We now know that DeepSeek’s secret sauce was primarily AI Compression technology. DeepSeek did not invent AI compression, but it was exceptionally good at combining advance multiple efficiency techniques at a very large scale.
It is highly unlikely that DeepSeek will become a material source of competition for US companies because personal data is directly collected, processed, and stored in the People's Republic of China. This raises serious security and privacy issues, especially for individuals and businesses entering proprietary codes, financial information, customer information, trade secrets, or confidential documents.
This has led to government restrictions on using DeepSeek. Even outside the US, Australia, India, Taiwan and others have restricted the use of DeepSeek on government systems/devices, and several European countries have investigated or restricted it over privacy and security concerns.
Jevon’s Paradox
In the 1800s, economist William Stanley Jevons observed that more efficient steam engines use less coal per unit of work, but because steam power became cheaper and more useful, overall coal consumption increased. This observation has become known as Jevon’s Paradox: when technology makes a resource cheaper and more efficient to use, total consumption of that resource can actually increase rather than decrease.
The question is not: Will AI models become more efficient? They almost certainly will. The central question is: Will AI usage grow faster than computing requirements per task decline? For example, if AI efficiency improves by 5-fold, but worldwide AI usage increases by 50-fold, then total compute demand would still increase by 10-fold.
Higher efficiencies can create applications that weren't economically practical previously, such as AI agents, autonomous vehicles, robotics, personalized medicine, AI video, real-time translation, smart factories, personal assistants, and untold amounts of devices. AI will likely turn from occasional queries into applications that are continuously running.
The Jevons paradox is one of the most important concepts for understanding the next stage of the AI investment cycle. AI compression will not destroy computing demand, but it will change where the computing occurs, moving from expensive data centers to smaller local applications. This will also alleviate controversies surrounding developing large data centers and the local water and power they consume.
Investment Choices
There are several companies developing AI Compression technology worth considering:
NVIDIA (NVDA) isn't known as an AI compression company, but the company claims its TensorRT-LLM memory management product can reduce costs by 7 to 10 fold (NVIDIA Investor Relations). Compression doesn't threaten NVIDIA. It may actually increase GPU utilization and make AI economically viable for vastly more applications needing less “horsepower” to work. The problem is that the stock price is anticipating enormous expectations already, as evidenced by its relatively high price/earnings (P/E) ratio.
Advanced Micro Devices (AMD) should benefit from compression because compressed models make the GPU market less dependent upon the absolute highest-performance training hardware. But this stock is trading on lofty expectations with a P/E of 120.
ARM Holdings (ARM) doesn't manufacture chips but it licenses CPU architecture and IP used throughout mobile and data centers. Compression is bound to be very favorable to ARM, but the P/E is over 300.
Ambiq Micro (AMBQ) is directly connected to the compression theme with its “CompressionKIT”, which is designed to compress sensor data before storage, transmission, and AI processing. But this small-cap has yet to have any earnings.
CEVA licenses semiconductor internet protocols for AI processing and wireless communications. However, this small-cap also has yet to have any earnings.
A Valuation Sleeper
Qualcomm (QCOM) is by far the best choice. This is a substantial company that has been around a long time. During the last nine months, Qualcomm generated $8.4 billion of operating cash flow which is greater than its $7 billion of net debt, and it repurchased $6.8 billion of its own QCOM stock.
Qualcomm's strength is power-efficient systems-on-chips (SOCs) containing central and graphic processing units working with neutral processing units (NPUs) which are designed to run AI locally on devices where power consumption, heat, and physical size is critical. Qualcomm supplies its Snapdragon chips to power two-thirds of Samsung’s products. Qualcomm's 2023 agreement with Apple covered Qualcomm’s Snapdragon 5G Modem-RF systems for Apple's 2024, 2025 and 2026 smartphone launches.
For years, Apple has made well known its intentions to make its own chips eventually, and Qualcomm management anticipates Apple revenue to gradually dissipate completely. Qualcomm’s stock price dropped 41 percent from its $251 at the end of May to $147, after Qualcomm reported that it expects its Apple product revenue to decline faster than previously anticipated, with its component share of Apple’s next iPhone launch falling below 20 percent.
Because Apple’s intentions have been well-known for years, Qualcomm has been actively diversifying to replace Apple’s lost revenue. Showing strong growth is the automotive sector where Qualcomm provides chips and software to enable Advanced Driver Assistance Systems and other features. Chips for industrial and robotics purposes and other Internet of Things (IoT) products are also showing strong growth.
Additionally, recently Qualcomm expanded its AI strategy into data centers, targeting $15 billion of data-center AI infrastructure revenue by 2029. Its AIMET product specifically provides model compression and quantization designed to reduce model size, latency, memory needs, and power consumption. In December 2025, Qualcomm purchased Alphawave for $2.3 billion, specifically intended to accelerate Qualcomm's data-center expansion by bringing applicable technologies.
In addition to making data centers significantly more efficient, Qualcomm’s AI Compression technology allows large AI models to run on a myriad of small applications and devices, personal computers, tablets, phones, cameras, robots, a vast assortment of industrial equipment, and various components of today’s high-tech automobiles such as autonomous driving. This puts Qualcomm directly in the growth path of the AI boom.
The drop of QCOM offers a value play in the AI boom. With earnings of $8.64 per share, QCOM trades under 20 times earnings, less than the overall market indexes, and a fraction of P/E ratios of its competitors. It also has a dividend yield of 2.2 percent.
The Diffusion Indexes
The Sound Advice Diffusion Indexes (discussed in detail later) identify business cycles and have an accurate track record of predicting major stock market trends over the last 50+ years. They work by observing changes in the most sensitive leading and lagging economic indicators that ultimately lead to significant shifts in interest rates.
During “Aggressive” signals, the S&P 500 climbed an average of 31.5 percent. The market has undergone corrections but has never crashed.
All market crashes have occurred during “Caution” signals. When the stock market was not crashing, the S&P 500 either meandered, climbed moderately, or declined in an extended bear market, recording an average decline of 0.6 percent.
This track record is not just a statistical anomaly. It is founded by simple logic. Falling and low interest rates are fuel for bull markets; rising and high interest rates are destructive. If our diffusion Indexes can predict upcoming changes in interest rate trends, they can also predict changes in stock market trends.
Having this perspective has been instrumental in resoundingly outperforming the S&P 500 during the current century, since the beginning of 2000. Our stock selections can be tailored to benefit from the upcoming economic landscape.
Our most recent signal change was in late 2022, when our Diffusion Indexes changed from “Caution” to “Aggressive”. That signal was prescient as a new bull market began.
Our next signal will come from our Diffusion Index of Lagging indicators, when the economy is beginning to overheat and exert lasting upward pressure on inflation and short-term interest rates. However, until we receive a “Caution” signal, we can take comfort that the current bull market is still in force. Of course, we still need to be selective with our individual investment selections and be ready to make changes.
The Sound Advice Recommendations
Individual stock recommendations are special situations offering a compelling value proposition. Also recommended are liquid electronically traded funds (ETFs) investing in sectors that are bound to benefit in the months and years ahead. Comments in bold reflect news and comments within the past month. If you click on the ticker symbol, a link will take you to more information. You will also find links to other information and reports. All recommendations, as well as their dividend yields and buy/hold/sell recommendations, are summarized in the table below, sorted by investment objective categories and then in alphabetical order.
We eat our own cooking. The Sound Advice Diversified Growth Fund invests exclusively in the Sound Advice Model Portfolio recommendations. The editor of Sound Advice for 36+ years, Gray Cardiff, manages the Sound Advice Fund and is also an investor on a side-by-side basis with the other investors. The Fund is up by 28 percent so far this year. You can request a prospectus here or at the bottom of this issue.
Equal Weight S&P 500 ETF
Invesco S&P 500 Equal Weight ETF (RSP)
This ETF invests in all the S&P 500 stocks but on an equally weighted basis and rebalances its portfolio each quarter to maintain its equal weights. This preservation of value is behind the superior performance over the traditional S&P 500 Index over the long-term. This ETF is bound to benefit from the broadening out of the bull market.
The Magnificent 7 stocks only represent 2.2 percent of this ETF. In 2025, RSP grew by 9.3 percent. The Magnificent 7 stocks only accounted for 0.7 percentage points of that growth.
From the beginning of 2000, RSP has outperformed all the major indexes, with an annual percentage rate (APR) of 6.99%. This compares to the Dow Jones Industrials with an APR of 5.4%; the Russell 2000 with an APR of 5.1%; the Nasdaq Composite with an APR of 6.4%; as well as the traditional S&P 500 Index with an APR of 6.3%. These returns compare to the APR of 8.9% from the Sound Advice recommendations over the same period.
We can use RSP as a bellwether by comparing it to the S&P 500 as a way of keeping an eye on the breadth of the market. If the evenly-weighted RSP is out-pacing the traditional capitalization-weighted S&P 500, then the breadth is expanding, which is a healthy sign. So far this year, RSP has risen 14.5 percent, more than the 12.3 percent rise of the S&P 500. These days, expanding breadth is also an indication that the benefits of AI are spreading into a broad range of companies as earnings growth has become strong outside the Magnificent Seven.
Special Situations
The following stocks are individual companies presenting extraordinary values within their respective industries. Here they are in alphabetical order:
Cisco Systems (CSCO)
Cisco is a company in epicenter of the AI boom. Cisco supplies the backbone of data center networking equipment and software and is a direct beneficiary of the billions of capital spending slated for data centers and AI related equipment. Additionally, Cisco has become a leading supplier of security solutions for the world’s enterprise companies deploying AI into their operations.
In mid-August, Cisco reported strong earnings for its fiscal year fourth quarter, with revenue up 18 percent from a year ago and earnings per share up 23 percent. Networking orders increased by 40 percent with evidence that Cisco's growth is broadening beyond simply selling equipment to a handful of giant AI customers. Management expects AI infrastructure revenue to increase 87 percent from $4 billion to $7.5 billion during the next four quarters.
As the mechanism of AI has moved from human driven bots to machine software driven “Agents”, the perceived cybersecurity risks of launching Agentic AI systems have grown due to the lack of control. In a recent interview on Blumberg TV’s Surveillance program, Cisco President and Chief Product Officer, Jeetu Patel, stated that a majority (61 percent) of US companies are afraid of scaling Agentic AI systems because of cybersecurity risks.
Cisco’s Live Protect is a new technology aimed at addressing this issue. Live Protect is being developed in collaboration with Anthropic and its technology called Glass Wing, which is designed to find and patch vulnerable areas in infrastructure systems. Live Protect is unique because it offers a shield while patches are being installed.
CSCO has climbed 43 percent since the beginning of the year.
JP Morgan Chase (JPM)
Considered to be the world’s highest quality banking enterprise with diversified businesses and prudent underwriting policies, JPM is a solid value. Deregulation of the industry will continue to be a substantial benefit to JPM. The Company has a long history of growing dividends. Management says that productivity in operations is improving and that AI programs could be scaled further.
Second quarter earnings were impressive, reporting $6.14 per share, after removing the impact of the sale in its Visa stake for $3.4 billion. JPM is selling at a 15 P/E, a bargain in today’s market, especially with its stellar balance sheet.
JPM has risen 13.7 percent since the beginning of the year.
RLJ Lodging Trust (RLJ)
The annual dividend of 60 cents is well-covered by the company’s cash flow. The net asset value is considerably more than the price of the stock. RLJ has risen 46 percent since the beginning of the year, not including the substantial dividends.
RLJ has a large and diversified portfolio of hotel properties, with 96 premium-branded, high-margin, focused-service and compact full-service hotels located in 23 states and Washington DC. This is a low-leveraged REIT because the company’s debt is only 44 percent of its (book value) assets.
RLJ Lodging Trust reported strong earnings in August for its second quarter along with improving fundamentals. Revenue per average room (RevPAR) increased by 6.8 percent from one year ago, which was a reversal from the previous year. Both pricing and occupancy contributed. Management said performance was helped by business travel, strong urban leisure demand and recently renovated and converted hotels, with particularly good results in markets including Austin, Chicago and Tampa.
The portfolio’s net operating income (NOI) for the trailing four quarters increased slightly to $378 million from $365 million. Using a conservatively high cap rate of 7.5 percent produces a portfolio value of $4.96 billion. Adding other assets and subtracting liabilities leaves the company equity of $3.1 billion. After subtracting the liquidation value of the company’s only preferred stock of $328 million leaves equity for the common shareholders of $2.75 billion. Dividing that equity by the 151 million shares of RLJ outstanding translates to a net asset value of $18.18 per share.
RLJ’s $1.95 Series A Cumulative Convertible Preferred (RLJPRA)
This is RLJ’s only preferred stock, with a liquidation preference of $25 per share, which is the maximum value that would be received from an acquisition of the company. Use limit orders on dips below $25.00 to accumulate this preferred stock for a safe annual yield close to 8 percent. The dividends for this preferred only consumed 11.7 percent of the company’s cash income and must be paid before common dividends, making the yield highly secure. The ticker symbol may vary with different brokerage firms.
Special Situations in Energy
Just after they have climbed substantially as geopolitical events unfolded in Venezuela and Iran, our energy selections were moved from “BUY” to “HOLD” in our April 1 issue of Sound Advice. The rise was so steep that the risk/reward ratio became no longer favorable. At close to the peak prices of these stocks, the April 1 issue projected that energy prices would be falling as events in Iran subsided, and when that happened and our energy selections corrected back to reasonable prices, they would be moved back to “BUY” recommendations. Because of the significant retracements of the stock prices and greatly improved valuations along with much better risk/reward ratios, our energy selections were moved back to “BUY” recommendations in the July 1 issue. Our energy selections have climbed since then and remain “BUY” recommendations because they are all still good values with P/E ratios that are less than the overall market.
Growth prospects increased significantly on August 28 when the US finalized a joint venture with Venezuela to rehabilitate the country’s badly deteriorated oil infrastructure. The venture, in which the US has a 55 percent interest, involves developing 17 Venezuelan oil fields containing more than 65 billion barrels of proven reserves.
Considering the longer term, as oil-rich parts of the world open up, there will be new sources of demand for the services and resources of US energy companies. Production and revenue is bound to increase even without high energy prices.
Energy providers also stand to benefit from the AI boom in two ways: Power needs from data centers is expected to double by 2030 after decades of stagnant demand in the US, and AI is a promising tool for finding, producing, and servicing natural resources.
The world’s inventories and strategic reserves have been depleted to the lowest levels in four decades and need replenishing. This will add to demand for the next several years.
Chevron (CVX)
A strong balance sheet with low debt, along with plenty of free cash flow, gives Chevron staying power during adverse conditions with the ability to make timely accretive acquisitions. Future dividend increases are bound to be supported by production growth from assets in the Permian Basin. The acquisition of Hess Corporation (HES) in July 2025 gave the company a 30% share in the Guyana Stabroek block which holds the equivalent of 11 billion barrels with a low production cost. Chevron’s daily production has risen above 4 million barrels.
Chevron already has an operating infrastructure along with decades of experience in Venezuela. Earlier this year, Chevron expanded its Venezuelan stake which included increasing its interest in the Petro-independencia joint venture to 49 percent. Additionally, Chevron is close to expanding its Petropiar heavy-oil operation which could expand into the neighboring Ayacucho 8 block.
After soaring to a peak of $211 at the end of March, CVX pulled back to 166 when it was moved back to a “BUY”. The high dividend yield puts a floor under the price of the stock and gives CVX a low risk profile. CVX has risen 36 percent since the beginning of the year. CVX still trades at a P/E ratio under 20, less than the overall market.
Exxon Mobil (XOM)
Low production costs and production from its immense Guyana field it shares with Chevron is boosting earnings. Benefits are also appearing from the 2023 acquisition of Pioneer National Resources, evidenced by new production growth in the Permian Basin. XOM also has an attractive dividend yield with a history of dividend increases. The dividend was increased again in 2025 for a solid string of 43 annual dividend increases.
Exxon suffered greatly when its Venezuelan properties were nationalized, and management somewhat hesitant to plow into Venezuela just yet. However, Exxon still has significant assets there and the US deal encourages investment there.
Earlier this year, Golden Pass LNG, a joint venture between Exxon Mobil and Qatar Energy, launched its inaugural shipment of liquefied natural gas (LNG) to Europe from Texas. Construction on the $10B LNG plant began seven years ago and expects to export 18 million tons a year when it is fully operational.
After shooting to a peak of $170 at the end of March, XOM pulled back to 136 when it was moved back to a “BUY”. The dividend yield lowers the risk profile. XOM is up by 39 percent so far this year. XOM still trades at a P/E ratio under 21, less than the overall market.
Halliburton (HAL)
As a premier oil field services company, Halliburton benefits from bringing new technology to increasing production of the world’s oil fields. The easiest portion of the oil in the world’s accessible oil reservoirs has been recovered, even in the Middle-East. Now it takes more sophisticated equipment and technology, which is what Haliburton provides. That trend puts HAL on an inexorable growth path.
The problem in Venezuela is not finding oil because it has the largest proven oil reserves in the world. The issue is recovering oil economically. After deteriorating from nationalization decades ago, the Venezuela’s oil fields desperately need Halliburton’s services.
Halliburton also has technological innovations that are tailor made for the unconventional reservoirs in the US, including its directional drilling system, the iCruise CX system, which is a rotary steerable tool, and the LOGIX drilling automation platform that makes it possible to reliably drill in curves and laterally in a single run. This new technology has been rapidly deployed in the Permian Basin.
Other relatively new Halliburton technologies include the Zeus platform, electric pumping units, Octiv Auto Frac, and Sensori subsurface measurement. These systems increase efficiency and replace outdated and costly diesel generators as power sources for onsite drilling with generators capable of using natural gas, LNG, and a variety of other fuels that are available on the drilling site.
In Alaska, where some of the nation’s largest oil and gas reserves reside, Halliburton’s EarthStar ultra-deep resistivity tool and reservoir mapping service delivers unmatched performance on the North Slope. Exploring in Alaska was curtailed by the Biden Administration, but that is now expanding under the Trump Administration.
After climbing to a peak of nearly $43 in Mid-May, HAL pulled back to 34 with a dividend yield of 2 percent when it was moved back to a “BUY”. The risk profile is higher than CVX or XOM, but the long-term growth prospects from here are good. HAL has risen by 39 percent since the first of the year. HAL still trades at a P/E ratio under 20, less than the overall market.
Valero Energy (VLO)
This premier oil refiner was added to the portfolio several years ago at $60.41 per share. As earnings have grown, VLO is still a good value with a low P/E and attractive dividend yield. Valero makes its money from the “crack spread”, which is the profit margin derived from purchasing crude oil, turning it into refined products such as gasoline and jet fuel, and selling those refined products.
Valero has the unique ability to refine both light crude oil coming from fracking in the US Permian basin as well as the sticky heavy crude coming from Venezuela. Light crude oil is great for refining into gasoline but not much else. Heavy crude is sought by refiners because it refines into many other products at high profit margins, ranging from diesel fuel to asphalt. Access to Venezuelan crude will benefit VLO as production there increases.
Valero’s ability to refine a variety of crude oil types gives it the ability to achieve discounts for its crude oil feedstocks. This flexibility and access allow Valero to capture the highest margins among its competitors because it can take advantage of the temporary gluts of crude, whether it’s low or high-quality crude or light sweet (low sulfur) or heavy sour (high sulfur) crude, to obtain the best available discounts for its feedstocks. The company’s refineries also have access to the US pipeline network from its gulf coast locations.
Valero’s “green energy” joint venture with Diamond Green Diesel is producing renewable diesel at large profit margins. Renewable diesel is made from animal or plant waste material which reduces greenhouse gas emissions up to 80 percent because it only releases as much carbon dioxide as the material originally contained. Renewable diesel does not congeal at low temperatures which means it can be easily transported through pipelines.
VLO rose to a peak of nearly $262 in Mid-May and did not pull back significantly along with our other selections when it was moved back to a “BUY”. VLO has risen sharply since then, climbing 103 percent since the beginning of the year on the prospects of expanding margins from higher prices for gasoline, jet fuel, and other refined products. Even after this year’s increase, VLO still has a very modest P/E of 15.
Special Situations in Healthcare
The healthcare sector has been languishing during the past three years. Returns were close to zero in 2023 and 2024. Some life returned in 2025, but the return for the entire three-year period was far below the rest of the market. As noted in the July 1, 2026, issue of Sound Advice “The Rotation to Healthcare”, the wake of this abandonment left this sector undervalued and replete with investment bargains. Since then, this sector has seen new life, and all our selections have advanced.
The healthcare sector is bound to benefit from the expanding use of AI. Already, X-rays, CT scans, and MRIs are scanned and analyzed more reliably and accurately. Leading edge dentists are now employing the technology. AI is particularly useful in analyzing large data sets for discovering new treatments and medicines, as well as addressing the sector’s nemesis, cost control, by improving administrative efficiency, patient monitoring, and data management.
In addition to being prime candidates for new AI technologies that are bound to improve efficiency and accelerate growth, healthcare stocks have several traits that make them desirable long-term investments. They are well-suited for an aging population, which exerts disproportionate demands on the healthcare industry. As the world’s population continues to age, this trend is inexorable, making the healthcare sector defensive in nature and more insulated from economic cycles than other sectors.
One of the main criticisms of most healthcare ETFs is that they are dominated by a relatively small number of large companies, such as Johnson & Johnson, which distort the performance of the typical healthcare ETF portfolio.
Invesco’s S&P 500 Equal Weight Healthcare ETF (RSPH)
By investing in the 65 healthcare stocks represented S&P 500 Equal Weight Healthcare Index, this ETF weighs each holding evenly. Both the Index and RSPH are rebalanced quarterly. This approach has given RSPH a superior performance to the large healthcare ETFs. RSPH has risen 15.5 percent since the beginning of the year.
AI’s power in analyzing large data sets is bound to enhance biotech companies’ ability to continue offering explosive profits and the world’s top breakthrough vaccines and treatments. Their stocks are often volatile, making diversification essential. This can be accomplished by investing in a diversified electronically traded fund (ETF) investing exclusively in a portfolio of biotech companies.
ARK Genomic Revolution Multi-Sector (ARKG)
This actively managed biotech ETF investing in companies expected to benefit by incorporating technological and scientific developments, along with advancements stemming from mapping the human genome. Technological breakthroughs in artificial intelligence and other high-tech advancements have cut the cost substantially of opening new opportunities and putting this sector on the cutting edge of many new innovations. ARKG has risen 54 percent since the beginning of the year.
Virtus LifeSci Biotech Products (BBP)
This is a passively managed biotech ETF that weighs the portfolio selections essentially equally, as opposed to the more typical practice of weighing selections according to market capitalization. This is an important aspect because biotech ETFs who weigh their portfolio selections essentially equally have been the best performers because they have larger investments in smaller biotechnology companies which have become acquisition targets for large pharmaceutical companies looking for ways to expand. BBP has risen 33 percent since the beginning of the year.
Moderna (MRNA)
MRNA skyrocketed on August 19, more than doubling, up 177 percent, on the news of a successful Phase 3 melanoma trial. The combination of Moderna's vaccine with Merck's Keytruda significantly reduced the risk of melanoma returning or spreading compared with Keytruda alone. This was the first successful late-stage trial of an individualized mRNA cancer vaccine and validates Moderna's mRNA oncology platform for other cancers.
Moderna (MRNA) has been included in the portfolio because it is the only pure investment play on Messenger RNA (mRNA) technology and this revolutionary technology is on a path to provide solutions for not only vaccines, but for cures and treatments for the most deadly and debilitating diseases haunting humanity.
MRNA has risen 440 percent since the beginning of the year.
Sector ETFs
Included in the Sound Advice model portfolio are the following electronically traded funds (ETFs) investing in sectors that are bound to benefit in the months and years ahead from fundamental changes in geopolitical, medical, and economic landscapes. These ETFs contain a portfolio of stocks, much like a mutual fund but, ETFs are liquid and trade like stocks with their own ticker symbols. Their prices are determined by the value of the portfolio of stocks they hold.
Artificial Intelligence:
Global Robotics and Automation Index ETF (ROBO)
Robotics and automation is the key to making the world’s companies more efficient. Approximately half of the portfolio is in robotics technologies, and the other half is in the technology controlling the robots – sensing, computing actuation, and artificial intelligence (AI). This is a diverse way of investing in AI which is the next technological frontier and will be playing an increasingly greater role in the way companies operate around the world. ROBO has risen 18 percent since the beginning of the year, exemplifying the expanding use of AI.
Consumer Staples:
Invesco S&P 500 Equal Weight Consumer Staples ETF (RSPS)
By investing in the consumer staple stocks within the S&P 500 Index, rhe nature of this ETF is defensive in nature and much less vulnerable to periods of soft or negative economic growth. Consumer stables are those unexciting products we use every day without much thought, ranging from food, beverages (including alcohol), household goods (including cleaning supplies), and hygiene products. These are products that people are unable (or unwilling) to remove from their budgets regardless of their financial situation. So far this year, RSPS is up 4.8 percent after spiking 10 percent in February as the Iran war broke out. The dividend yield is close to 3 precent on this defensive ETF.
Infrastructure and Cap Ex:
Trillions are going into capital expenditures. Hundreds of billions alone are slated this year to build the brains of AI – data centers and the related infrastructure. Outside of the AI boom, trillions are planned for new production facilities in a wide range of industries, from critical minerals and materials to Pharmaceuticals, to move production onto the safe and reliable shores of the US. These ETFs are bound to be primary beneficiaries.
Invesco S&P SmallCap Industrials ETF (PSCI)
Based on the S&P SmallCap 600 Capped Industrials Index, this ETF is designed to measure the overall performance of the securities of US industrial companies with small capitalizations (caps). These domestic companies are engaged in the business of providing domestic industrial products and services, including engineering, heavy machinery, construction, electrical equipment, aerospace, and defense, as well as general manufacturing. They will reflect the positive impacts more strongly than larger companies from an increase in domestic capital spending. Small cap construction companies typically operate inside the US on local construction projects that tend to employ local companies as subcontractors, even when general contractors may be national companies. PSCI has risen 13.9 percent since the beginning of the year.
Invesco S&P 500 Equal Weight Materials ETF (RSPM)
By investing in the companies that comprise the S&P 500 Equal Weight Materials Index, the portfolio of this ETF contains prime examples of basic materials companies outside of the oil and gas industries. Increased capital expenditures will translate into demand for basic materials. RSPM has risen 20.6 percent since the beginning of the year.
Downside Hedges
Downside hedges are part of the portfolio to reduce risk and dampen volatility by profiting during market corrections. Minimizing losses, even at the expense of limiting the upside, has been our key strategy for outperforming the market over the long run. The suggested hedges below are leveraged, so you only need relatively small investments to hedge your portfolio.
ProShares UltraShort S&P 500 (SDS)
This ETF is designed to produce two times the daily fluctuations of the traditional S&P 500 Index, only in reverse. For example, a decline of say,1.0 percent in the Index will cause SDS to increase by 2.0 percent. Conversely, an increase in the Index will cause SDS to decline by 2.0 percent. SDS is included as a hedge because the S&P 500 Index is distorted and inflated.
The stocks of the Magnificent 7 -- Nvidia, Apple, Microsoft, Amazon, Alphabet Class A (Google Class A & C), Tesla, Meta Platforms Class A, and Broadcom – comprise 34 percent of the S&P 500 Index due to their heavy capitalization weighting, and are perched at an astronomical price/earnings (P/E) ratio of 66.3. It should be noted that Tesla’s P/E of 368 counts heavily in the average because it is such a large number. Without Tesla, the average P/E ratio is 28.6, which is still high by historical standards. The AI race is forcing these companies to transform from low-debt, high cash flow Wall Street darlings to spenders of billions, financed by large amounts of new debt, no longer deserving of lofty P/E ratios.
Another sign that the S&P 500 Index is inflated is revealed from the Sound Advice Risk Indicator (discussed in more detail below), which compares the Index to house prices for 130 years. The latest reading is 2.91, which puts the S&P 500 Index well above the high-risk watermark of 2.0.
The Russell 2000 Index
This index is comprised of small and mid-sized domestic companies which tend to be more volatile than the overall market, especially during market corrections. After the close on Friday, June 26, this index conducted its semi-annual rebalancing. Forty-three companies graduated to the large-cap Russel 1000 because of the increase in their capitalizations (stock price multiplied by the number of outstanding shares). These were the most profitable companies in the Russell 2000. Being added are small cap company stocks primarily focused on healthcare and financial services while combined exposure to technology and industrials declined.
Prior to the rebalancing, 40 percent of the 2000 companies did not have positive earnings. The Russell 2000 is now even more sensitive to macroeconomic conditions with a greater share of small-cap companies and the loss of 43 of the most profitable companies. The portion of profitable companies in the index has experienced a steady downward trend over the past three decades. In the mid-1990s, roughly 85 percent of Russell 2000 companies had positive earnings as opposed to 60 percent before the rebalancing, which is bound to be lower now.
The following two ETFs below can also be used as a downside hedge because they short sell the Russell 2000 index. They differ in the leverage employed, which you can choose one according to your investment objectives and risk tolerance.
ProShares UltraShort Russell2000 (TWM)
This ETF is designed to produce two times the daily fluctuations of the Russell 2000 index (IWM). A decline of say,1.0 percent in the Russell 2000 will cause TWM to increase by 2.0 percent. Conversely, an increase in the Russell 2000 will cause TWM to decline in the same fashion.
ProShares UltraShort Pro Russell2000 (SRTY)
This ETF is designed to produce three times the daily fluctuations of the Russell 2000 index.
A Final Note from the Editor
My 50+ years of investing has taught me some valuable lessons: Stay diversified and manage your risk. Keep in mind that a 50 percent decline, for example, requires a 100 percent recovery just to break even. Avoiding or hedging for severe declines, along with analyzing the risk/reward ratios of individual investments, is the secret to superior investment results over the long term, even if it means giving up some upside. This is why the Sound Advice portfolio has not only outperformed the S&P 500 and other market indexes for more than 25 years, it has done so with lower risk as measured by the Sharpe Ratio, a widely accepted method used to quantify risk by comparing the investment return to the volatility of a portfolio over a period of time.
Best regards and happy investing.
– Gray Cardiff.
