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With the FTSE 100 not far away from record highs, some investors might think there aren’t any bargains left in it. I disagree, as the index performance differs from some constituents. I have my views on the good value stocks that exist right now, but I thought I’d turn to my AI friend ChatGPT to see where it would direct me when I posed the question of finding the best bargain right now.
A confusing answer
I was pretty surprised when ChatGPT presented me with AstraZeneca (LSE:AZN) as the best value stock in the FTSE 100. What surprised me even more were the reasons behind the decision.
The first point was based on valuation, which is a sensible place to start. It flags up that, based on the full-year projection of 7% revenue growth and 14% earnings per share growth, it’s currently good value. Yet when I look at the price-to-earnings (P/E) ratio, it stands at 28.14. This is well above the FTSE 100 average. Even when I look at peers, I can find better value. For example, the P/E ratio of GSK is 18.24.
It went on to talk about the business having an attractive dividend yield. This doesn’t directly relate to a company being a bargain play, but I’ll overlook it on this occasion. Yet the current yield is 2.35%. This is below the FTSE 100 average of 3.33%. According to ChatGPT, AstraZeneca offers solid income potential.
Although the firm indeed has a good track record of paying out income and growing the dividend per share over time, I disagree that the yield is anything to write home about.
One valid angle
The final point used to justify the suggestion was strong growth drivers. It spoke about having a robust pipeline of around 200 drugs, with new oncology and cardiovascular drugs driving top-line momentum. Half-year results are due out at the end of July, but the latest Q1 results did show a good 34% increase in reported earnings per share versus the same period last year.
This shows the business has momentum, and I agree. But does this mean it’s undervalued? Not really. I feel AstraZeneca should be classified more as a growth stock right now, not a bargain. Although the 14% drop in the share price over the past year makes it a dip worth considering for investors, I don’t believe ChatGPT got this pick right at all.
My view
This is the first time that I’ve seen ChatGPT get a stock pick this wrong. I’d be using the P/E ratio and looking for a stock with a figure below 10. For example, Barclays has a ratio of 9.03. It’s performing well, with the stock up 53% in the last year. It has good momentum, just like AstraZeneca, but is much better value in my eyes.
It goes to show that although AI has many uses, investing still needs a human touch!
