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The FTSE 100‘s filled with compelling investment opportunities. Sadly, not all of its constituents pass muster. So being able to filter out the duds to find long-term winners is a critical skill that stock pickers have to master when not relying on a talented investment advisor.
There’s no denying it’s a time-consuming process, but with artificial intelligence (AI) tools getting smarter, could ChatGPT help accelerate this process?
The AI model has put forward six large-cap companies so potential choices: Rolls-Royce (LSE:RR.), BAE Systems, Legal & General, Shell, Unilever, and J Sainsbury. This collection certainly provides a nice bit of industry diversification, covering aerospace and defence, finance, energy, and consumer staples. And with each having a large market capitalisation with relatively stable cash flows, these seem to be dependable businesses. But does that make them good investments?
Reviewing recommendations
| Company | 5-Year Revenue Growth Rate | Operating Profit Margin | Price-to-Earnings Ratio |
| Rolls-Royce | 11.4% | 15.5% | 25.3 |
| BAE Systems | 8.7% | 10.2% | 26.3 |
| Legal & General | 5.0% | 1.6% | 71.6 |
| Shell | 15.9% | 10.5% | 13.0 |
| Unilever | 4.8% | 15.2% | 24.0 |
| J Sainsbury | 3.4% | 2.8% | 14.6 |
Let’s start by looking at the revenue growth rates. Immediately, we can spot that Legal & General, Unilever, and J Sainsbury are not high-growth enterprises.
With fierce competition and 15.7% of the UK grocery market already under its umbrella, J Sainsbury doesn’t have many levers it can pull to supercharge sales. Unilever’s in a similar boat. Its branded products are already in almost every shop across the globe. Hence, sales growth is now largely driven by price hikes. Legal & General also faces stiff competition, especially from fintech firms that have been steadily chipping away at its market share.
Looking at Rolls-Royce and BAE Systems, the growth’s a bit more promising. Being aerospace companies, demand has been getting stronger lately as European defence spending starts to tick up. And with rising energy costs in recent years, Shell has also had an impressive run. However, it’s important to remember that oil & gas prices are notoriously cyclical and periods of high growth are often followed by periods of lacklustre growth for this enterprise. So this figure might be a bit misleading.
Digging deeper
Only two out of the six — Rolls-Royce and BAE Systems — seem to offer promising sales growth. Rolls-Royce’s recent structural overhaul has paved the way to superior operating profit margins, giving it an upper edge. And unlike BAE Systems, its fate isn’t almost entirely linked to defence spending, with operations spanning the civil and energy sector, including promising nuclear technology that could drive significant long-term growth if successful.
Pairing all this with a slightly cheaper valuation, Rolls-Royce appears to be the best pick out of this collection. But does that mean investors should rush to buy?
While a promising enterprise, there are some key risks to consider here. The firm’s restructuring has worked wonders on improving the health of the balance sheet, but it still carries a substantial debt burden. The firm’s also highly sensitive to disruptions in the global supply chain that can drive up material costs and slash its profit margins.
For the right price, Rolls-Royce could be a terrific investment. But with its future growth potential seemingly already baked into the FTSE 100 stock, investors may want to look elsewhere for market-beating returns.
With that in mind, ChatGPT’s picks don’t appear to be very novel or consider valuation (a critically important step in picking stocks). And I think there are far better FTSE 100 stocks investors can consider right now.
