Buy the Chip Dip: The Under-the-Radar AI Winner to Buy Now

Key Concepts

• Quantitative Strategy: A data-driven investment approach that uses mathematical models and algorithms to identify stocks based on fundamental metrics.
• Factor Grades: A scoring system (Value, Growth, Profitability, Momentum, EPS Revisions) used to evaluate stocks relative to their specific sector.
• Alpha Picks: A portfolio product that selects the two top-performing quantitative ideas each month.
• Sector-Relative Basis: A methodology where a company’s metrics are compared against its industry peers rather than the broader market.

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Market Sentiment and Semiconductor Pullbacks

Steven Cress, VP of Quantitative Strategy at Seeking Alpha, addresses the recent volatility in semiconductor stocks. He argues that the current pullback is driven by market sentiment rather than deteriorating fundamentals.

• Drivers of Volatility: Geopolitical instability and investor nervousness regarding "overextended valuations" in AI-related stocks.
• Fundamental Strength: Despite the price dip, semiconductor companies continue to beat top-line (revenue) and bottom-line (earnings) expectations. Cress suggests that for investors, this environment represents a potential buying opportunity rather than a fundamental shift in the industry's health.

Case Study: Credo Technology Group Holdings (CRDO)

Cress highlights Credo as a "strong buy," noting its significant performance despite the broader tech sell-off.

• Performance: Since being added to Alpha Picks in February 2025, the stock has returned approximately 275%. Over the last six months, the stock is up 82%.
• Valuation Stability: A key insight is that while the stock price has surged, the valuation framework remains consistent (C- grade), indicating that the company’s growth has kept pace with its price appreciation.
• Growth Metrics:
  • Revenue Growth: 206% year-over-year, significantly outperforming the sector average of 11.3%.
  • EPS Forward Growth: Analysts estimate a 3–5 year growth rate of 39%, compared to 18% for the sector.
• Profitability: The company’s profitability grade improved from a B to an A- over the last six months, demonstrating operational efficiency.
• Market Position: Credo ranks 12th out of 69 stocks in the semiconductor sector and 30th out of 532 in the IT sector. Its growth is fueled by high-connectivity AI data center solutions and specialized cabling (ethernet and optical).

The Alpha Picks Methodology

The Alpha Picks model is designed to isolate stocks with superior fundamental health. The framework relies on five core pillars:

1. Value: Assessing if the stock is priced fairly relative to its sector.
2. Growth: Identifying companies with superior revenue and earnings expansion.
3. Profitability: Measuring the company's ability to generate profit from its operations.
4. Momentum: Tracking the upward trend in stock price.
5. Positive EPS Revisions: Monitoring analyst upgrades to earnings expectations.

Performance Data:

• Four-Year Track Record: The Alpha Picks portfolio has returned over 400% compared to the S&P 500’s 95%.
• Year-to-Date (YTD): The portfolio is up nearly 40%, significantly outperforming the S&P 500’s 8% gain.

Synthesis and Conclusion

The core takeaway from the discussion is that investors should look past short-term price volatility and focus on fundamental data. By utilizing a quantitative, sector-relative approach, investors can identify companies like Credo that exhibit explosive growth and improving profitability, even during market downturns. Cress emphasizes that the Alpha Picks system succeeds by consistently filtering for high-quality fundamentals, which has historically led to significant outperformance against the broader market.