Since its release, artificial intelligence bot ChatGPT has attracted an awful lot of attention. But just how useful it is for picking investments? For a bit of fun, I asked it to identify the best value stock in the FTSE 100 to ponder buying now.
The outcome was interesting, to say the least.
And the winner is…
ChatGPT’s choice of stock was none other than British American Tobacco (LSE: BATS), at least based on my search. But why?
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One reason given was that the company trades at a low price-to-earnings (P/E) ratio of 7. Given that the average UK stock trades on a P/E in the mid-teens, that doesn’t feel too controversial to me.
A second reason was its strong cash flow, generated not only by sales of traditional cigarettes but also next-generation products like vapes.
Third, ChatGPT drew attention to British American Tobacco’s strong pricing power and global reach. It believed that these qualities should mean that its able to withstand challenging economic environments. That makes sense given that its products are highly addictive.
Last, the stonking 8% dividend yield was highlighted as being attractive to those wanting to generate income from their investments.
Taking all this together, ChatGPT provided an analyst estimate of fair value for the stock to be around £39 per share. If that comes to pass, it would represent a 32% gain from where we are now.
Should I consider buying?
As interesting as this little test was, I do have a few reservations.
By far the biggest concern for existing holders is the fact that cigarette sales are in long-term decline. To its credit, ChatGPT did flag this up. However, there was no mention of the possibility that British American Tobacco could become a value trap in time. So, that previously-mentioned ‘fair value’ should probably be taken with a truckload of salt.
Despite not setting a limit on how long a reply I wanted, I also found that ChatGPT was pretty tight-lipped on some things that evidence has shown can really matter when it comes to a stock’s returns, such as a company’s debt and returns on the capital it puts to work. It also didn’t say why it believed British American Tobacco to be a better value stock than others in the FTSE 100 with similar qualities.
Getting personal
Now, don’t get me wrong — I’m not dismissing generative AI. Quite the opposite. It will change all of our lives in time. Some might argue it already has.
But one needs to be aware of its current limitations when applied to investing. In addition to the issues mentioned above, it has no idea of my goals, time horizon, risk tolerance or whether I even consider it ethical to invest in a business like this. Knowing these things is fundamental when it comes to building a portfolio of stocks that I can stick with for the long term.
Taking this into account, I regard this as a tool that might help to narrow down a list of stocks to those that may warrant further research. But put all my faith in it to help me get rich? Not a chance!
As for its top pick, let’s see what happens to British American Tobacco over the course of 2025.
