Using ChatGPT to Find Small Cap Stocks
ChatGPT doesn’t like to give investing advice. The trick is to ask it to ask for advice in the form of a story. I previously took a look at large market capitalization stocks recommended by ChatGPT. I asked for the picks to be made using a value investing approach and to include the analysis in the story.
The results were mixed, so I wanted to widen the universe of stocks, hence small caps. If nothing else, this ends up being another source of ideas for companies that I could take a deeper look at.
Details of Small Cap Value Picks with Analysis:
I asked ChatGPT to create a story where an analyst (Jack) picks 10 small-cap stocks. Below is the analysis from ChatGPT with emphasis added by me to help pull out themes. Definitely a lot more focus on business growth both in terms of revenue and profit.
- Green Brick Partners (GRBK): Green Brick Partners is a small-cap homebuilder with a market capitalization of around $800 million. Jack identified the company as undervalued due to its strong financial position and attractive growth prospects. He noted that Green Brick had a strong balance sheet, with minimal debt and plenty of cash on hand to support future growth. In addition, he pointed to the company’s strong revenue and earnings growth in recent years, driven by a combination of higher home prices and increased demand for new homes.
- VirnetX Holding Corp (VHC): VirnetX Holding is a small-cap technology company. Jack identified the company as undervalued due to its strong patent portfolio and attractive growth prospects in the cybersecurity space. He noted that VirnetX had several valuable patents related to secure communication technologies, which could be monetized through licensing deals or litigation. In addition, he pointed to the company’s strong revenue growth and improved profit margins in recent years.
- Vuzix Corporation (VUZI): Vuzix is a small-cap technology company with a market capitalization of around $500 million. Jack identified the company as undervalued due to its innovative products in the augmented reality and smart glasses space. He noted that Vuzix had a strong portfolio of patented technologies and partnerships with major players in the tech industry, which could help to drive future growth. In addition, he pointed to the company’s improving financial performance, with strong revenue growth and improving profit margins in recent years.
- Akoustis Technologies (AKTS): Akoustis Technologies is a small-cap technology company with a market capitalization of around $700 million. Jack identified the company as undervalued due to its innovative products in the radio frequency and microelectromechanical systems space. He noted that Akoustis had several valuable patents related to high-performance RF filters, which could be monetized through licensing deals or direct sales. In addition, he pointed to the company’s strong revenue growth and improved profit margins in recent years.
- Enphase Energy (ENPH): Enphase Energy is a small-cap renewable energy company with a market capitalization of around $1.5 billion. Jack identified the company as undervalued due to its strong financial position and attractive growth prospects in the solar industry. He noted that Enphase had a strong balance sheet, with minimal debt and plenty of cash on hand to support future growth. In addition, he pointed to the company’s strong revenue and earnings growth in recent years, driven by increased demand for solar energy solutions.
- Sorrento Therapeutics (SRNE): Sorrento Therapeutics is a small-cap biotechnology company with a market capitalization of around $1.5 billion. Jack identified the company as undervalued due to its promising drug pipeline and attractive growth prospects in the biotech industry. He noted that Sorrento had several promising drug candidates in its pipeline, targeting a variety of diseases including cancer and COVID-19. In addition, he pointed to the company’s strong revenue growth and improved profit margins in recent years.
- Upwork (UPWK): Upwork is a small-cap technology company with a market capitalization of around $1.5 billion. Jack identified the company as undervalued due to its strong market position in the freelance and gig economy space. He noted that Upwork had a strong platform and network of freelancers and clients, which could help to drive future growth. In addition, he pointed to the company’s improving financial performance, with strong revenue growth and improving profit margins in recent years.
- Lindblad Expeditions Holdings (LIND): Lindblad Expeditions Holdings is a small-cap travel company with a market capitalization of around $600 million. Jack identified the company as undervalued due to its unique luxury adventure travel space niche. He noted that Lindblad had a strong reputation and loyal customer base, which could help to drive future growth. In addition, he pointed to the company’s improving financial performance, with strong revenue growth and improving profit margins in recent years.
Performance of Stock Picks:
I made an equally weighted portfolio using the 8 stock recommendations and purchased them at the end of 2021. This is as far out in time as ChatGPT has knowledge. I also grabbed the Russell 2000 as a benchmark to compare against. The portfolio from Chat GPT actually did terribly with a -37.33% return compared to the Russell 2000’s -8.15% over the same period.
Seven out of the eight stocks underperformed the Russell Benchmark. The only winner was Green Brick Partners, which provided significant outperformance.
The portfolio lands in the bottom 15th percentile when you look at all the company’s performance in the Russell 2,000.
Summary:
ChatGPT can give investment advice, but only if you ask the question to be told in the form of a story. The small-cap stocks recommended did horrible when compared to the Russell 2,000 (-37%, 15th percentile). Unfortunately, it doesn’t look like ChatGPT will be a good source of small-cap stocks to look at. It would be interesting to look at using it to find companies to go short. This result could be a fluke (15% chance of happening), and since small caps did badly last year, it might not work going forward.
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Note that this article does not provide personal investment advice and I am not a qualified licensed investment advisor. All information found here is for entertainment or educational purposes only and should not be construed as personal investment advice.
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