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This month’s quarterly review by FTSE Russell was a damp squib. There were no changes to the FTSE 100 index.
To claim a prized place in Britain’s leading benchmark, a UK company needs to have a sufficient market cap to leapfrog a FTSE 100 constituent. The next opportunity for Footsie promotion comes in September’s reshuffle.
I was curious which UK shares ChatGPT backs for potential inclusion in the blue-chip index. Here’s what the artificial intelligence (AI) chatbot said.
There are advantages to being a FTSE 100 member. A business can benefit from increased investor demand due to automated share purchases by exchange-traded funds (ETFs), easier access to capital markets, and greater visibility for institutional investors.
There can also be a liquidity boost with larger trading volume for a company’s shares. Plus, FTSE 100 firms tend to have more lobbying power due to better political and regulatory access.
The shares ChatGPT backed
Relying on AI for stock market tips comes with plenty of health warnings. ChatGPT makes mistakes. Putting its skills to the test, I’m afraid my digital aide came up short.
The first stock it tipped for FTSE 100 promotion was housebuilder Taylor Wimpey. I’m already a shareholder. It’s a solid business with strong growth potential and big dividends, even if it faces challenges from UK house price weakness. But, there’s a problem with this pick.
ChatGPT described Taylor Wimpey as “a large-cap member of FTSE 250“. That’s not true. It’s already a FTSE 100 constituent, and has been for over a decade. It can’t be promoted to an index it’s already in!
It’s a poor start, but what about the chatbot’s other choices?
It also picked three bona fide FTSE 250 stocks, namely energy firms Hunting Plc and Ithaca Energy, alongside defence business Chemring Group.
I’d seriously question the inclusion of oil services company Hunting Plc. It has a market cap of just £446m. By contrast, the FTSE 100 stock with the lowest valuation is JD Sports, at £3.86bn. ChatGPT’s suggestion that the company can deliver a ninefold increase in its market cap in time for the next reshuffle isn’t credible.
A FTSE 250 defence stock
Besides Taylor Wimpey, ChatGPT was particularly keen to champion defence technology business QinetiQ (LSE:QQ.).
Valued at £2.82bn, it’s still a long way from FTSE 100 membership, but the company has growth potential. QinetiQ operates mission rehearsal facilities and test ranges for military equipment and systems. It also has a strong cybersecurity and robotics offering.
As NATO prepares for warfighting readiness in light of Russian aggression in Ukraine, the long-term demand outlook for QinetiQ’s services looks encouraging. A price-to-earnings (P/E) ratio of just 10.6 means the stock’s attractively valued relative to the sector, too.
That said, near-term risks are high. Contract delays in the UK and the US have led to the company recently issuing a profit warning. This slowdown’s particularly concerning in the context of an ongoing boom for the defence industry.
QinetiQ shares may find their way to the FTSE 100 one day, but I don’t think it’ll happen anytime soon. Right now, other defence stocks look like more attractive ways to gain exposure to this fast-growing industry. I won’t be buying today.
