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DeepSeek is a real force in artificial intelligence (AI). Its advancements took the stock market by surprise in January and, as it is one of the most advanced AI platforms available, I asked it to pick me the best UK stocks to buy.
Here’s what it said
DeepSeek AI identified several stocks it deems undervalued in the current market. Among the top picks was Associated British Foods, a diversified consumer staples company with a market capitalisation of £13.9bn. The platform noted that ABF’s relatively low price-to-earnings (P/E) ratio of 9.5 times and significant potential for 34.8% price appreciation make it an attractive option for value investors. The company’s stable earnings from its Primark retail division and food businesses provide a solid foundation for growth, while its 2.2% dividend yield offers an appealing income stream.
Another standout recommendation is 3i Group (LSE:III), a private equity firm with a market cap of £40bn. The large language model noted that with a P/E ratio of 9.5 and 30.5% of possible appreciation, 3i Group presents a compelling investment case. The company’s diverse portfolio spanning healthcare, consumer goods, and business services positions it well for strong capital appreciation. Recent reports indicate robust performance, with 3i Group’s main asset, Action, maintaining impressive sales growth and earnings margins exceeding expectations.
For investors interested in the technology and communications sectors, DeepSeek suggests considering Herald Investment Trust. While specific financial reasoning was limited, DeepSeek liked the trust’s focus on smaller tech companies.
Rounding up, DeepSeek said that the combination of low P/E ratios and significant growth potential in companies like ABF and 3i Group suggests that the market may be undervaluing their future earnings potential.
Some food for thought
The P/E ratio and the average share price targets, which DeepSeek referenced, are great places to start when investigating whether a stock is a good buy. However, when assessing P/E ratios, it’s essential to compare them within the same industry, as what constitutes a good P/E for one sector may be poor for another. Likewise, growth is key. A P/E ratio of five, for example, could be attractive but misleading especially if earnings are heading in reverse — that’s not uncommon on the FTSE 100 and FTSE 250.
Having said this, I do believe 3i Group is an interesting opportunity. The company reported a 20% total return for the nine months to December 2024, with NAV per share increasing to 2,457p. Action, 3i’s major investment, continues to deliver exceptional results, with net sales and operating adjusted earnings up 22% and 29% in 2024.
The company’s diverse portfolio and strategic focus on growth investments have contributed to solid earnings momentum. With a well-funded balance sheet, successful recent disposals, and new investments, 3i Group demonstrates resilience in challenging market conditions. The company’s consistent dividend growth and strong liquidity position further enhance its appeal to investors.
However, no investment comes without its risks. The company acknowledges an uncertain geopolitical environment and weak growth across much of Europe, which could impact portfolio performance. Nonetheless, I may consider this stock after further research. I must confess, I haven’t given it my full attention in recent years.
