3 Stocks to Buy Now — 3 to Avoid

Key Concepts

• Software Downturn: Concerns about the impact of AI (specifically Claude and ChatGPT) on established software companies.
• SAS (Software as a Service): The historically profitable software model now facing disruption.
• Chaken Power Gauge: A proprietary system for ranking stocks based on momentum.
• Relative Strength: Comparing a stock’s performance to the broader market (S&P 500).
• Data Center Growth & Semiconductor Demand: The driving force behind bullishness in specific tech sectors.
• Mid-Cap Focus: Prioritizing mid-sized companies over large-cap names in the semiconductor space.
• Higher Highs & Higher Lows: A key technical indicator of an uptrend.
• Midterm Election Year Cycle: Historical market patterns associated with midterm election years.

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Software Sector Analysis & Concerns

Mark Chaken identifies a significant downturn in the software sector, despite overall market highs (S&P 500 and Dow). This downturn stems from investor anxiety regarding the potential for AI tools like Claude and ChatGPT to disrupt the established software market. Specifically, the ability to build custom software solutions using AI platforms raises questions about the long-term viability of companies like Adobe, Zscaler, and PaloAlto Networks, whose business models rely on providing pre-built software solutions.

He references Mark Andre’s 2018 observation that “software was eating the world,” a statement that proved accurate for the subsequent 15 years, driven by the SAS model. However, the current AI advancements pose a threat to this model, as users can potentially replicate functionalities previously offered by these companies at little to no cost.

While acknowledging arguments that large corporations are slow to adopt change and have deeply embedded software, Chaken cautions that some companies are more vulnerable than others. He contrasts Roblox, which he believes is highly susceptible to disruption, with Salesforce.com, which is deeply integrated into business processes and less likely to be quickly replaced. He also points to Doximity as a company facing potential competition from AI-powered knockoffs due to low barriers to entry. He emphasizes that companies with large installed bases (Adobe, Salesforce, PaloAlto Networks) are more likely to survive, but their premium valuations may be at risk.

He explicitly advises against buying software stocks at the current time, likening it to “catching a javelin” – a painful and ill-advised maneuver. He notes Microsoft filled a gap dating back to March/April, indicating significant damage.

Identifying Momentum in Tech: A Three-Stock Strategy

Chaken identifies three tech stocks exhibiting strong momentum, driven by the growth of AI and data centers. He emphasizes a shift in bullishness away from software and towards the infrastructure supporting AI.

1. Antto Innovation (NTO): This company manufactures testing equipment and software to ensure the reliability of semiconductor chips used in data centers. Chaken views this as a “nuts and bolts” business that allows investors to participate in the AI boom without directly investing in chip manufacturers. Antto has a $10 billion market cap and recently broke out from a triple top at $140, rallying to $220 before a pullback to $182. He recommends buying on pullbacks, noting positive money flow. He acknowledges competition exists but believes Antto’s established customer base and the rapid pace of data center buildout provide a competitive advantage.

2. Ancore Technologies (AMKR): This company provides test services and semiconductor packaging. Like Antto, it experienced a spike in January following a strong report from Taiwan Semiconductor Manufacturing (TSMC), suggesting a broader industry-wide positive shift. Chaken emphasizes a top-down approach, focusing on mid-cap companies with a bullish Power Gauge rating, outperforming the S&P 500, and exhibiting positive money flow. He highlights the importance of identifying stocks making “higher highs and higher lows” over a three-month period.

3. Nphase: While acknowledging Nphase as a “turnaround stock” due to its focus on semiconductors for solar panels, Chaken notes its potential benefit from the increased energy demands of data centers. He initially avoided the stock due to weak relative strength but now sees it as attractive following a recent improvement in its performance relative to the S&P 500 and a strong earnings report. He contrasts Nphase with Bloom Energy, noting Nphase’s lower price-to-sales ratio (4x vs. Bloom’s 20x) as a sign of less risk.

The Chaken Power Gauge & Investment Methodology

Chaken’s investment strategy relies heavily on his proprietary “Power Gauge” system, which ranks stocks based on momentum. He outlines a specific methodology for identifying promising stocks:

• Focus on Mid-Cap Companies: Avoiding the well-known large-cap names.
• Bullish Power Gauge Rating: A fundamental requirement.
• Outperformance vs. S&P 500: The stock must be exceeding the market’s performance.
• Positive Money Flow: Indicating institutional buying pressure.
• Uptrend Confirmation: Identifying stocks making higher highs and higher lows over a three-month period.

He stresses the importance of avoiding “turnaround plays” and emphasizes buying on pullbacks to secure better entry points.

Broader Market Outlook & Midterm Election Year Dynamics

Chaken believes the market is currently following the typical pattern of a midterm election year, characterized by a weaker performance compared to other years in the presidential cycle. He anticipates a potential sell-off in late September as the election outcome becomes clearer. However, he views the current sector rotation – away from the “Magnificent 7” and towards cyclical sectors like financials, industrials, energy, and pharmaceuticals – as a healthy sign for the overall market. He remains optimistic but cautions that a more defensive approach may be necessary in 2026.

He states, “The market is playing out the midterm election year script perfectly so far.” He also notes that historically, the year before a presidential election is the strongest.

Notable Quote

“It’s the proverbial catching the javelin. You try and catch the javelin and you end up with a bloody hand. It’s not easy to do. Painful.” – Mark Chaken, on attempting to buy the dip in struggling software stocks.