I’m keen to buy some cheap shares for this year’s Stocks and Shares ISA, and wondered if AI could help. And I’ve fiddled around with ChatGPT enough to know its limitations, but was curious to see what it would throw at me.
I’ve made a habit of snapping up cheap FTSE 100 shares, particularly those paying high dividends. So I shouldn’t have been surprised to see ChatGPT recommend two stocks I already own. But I was.
AI sees life in Legal & General shares
The first was Legal & General Group (LSE: LGEN). I bought the insurer and asset manager on three occasions in 2023, when it really was cheap, with a price-to-earnings (P/E) ratio of six or seven. ChatGPT said it’s cheap today, quoting a P/E of nine times.
This highlights the first problem of using a robot to select stocks. ChatGPT doesn’t always land on the latest info. Legal & General’s P/E has shot up to 33 times. That follows two sharp, successive drops in earnings per share, from 34.19p to 12.84p in 2022, then to just 7.35p last year my figures, not ChatGPT’s). So it’s no longer cheap.
The Legal & General share price is up just 0.75% over the last year, and 2.4% over five. At least it’s remained steady over recent volatile weeks.
This suggests it has defensive grit and it offers one brilliant attraction – a huge trailing yield of 8.25%. Which ChatGPT highlights. It could hardly miss it.
My slightly unreliable robot buddy also said Legal & General “benefits from an ageing UK population and growing demand for retirement solutions”, but has “underperformed recently due to bond market volatility and interest rate uncertainty”.
No arguments with that. AI also warns of “regulatory challenges” but it always does that.
I think Legal & General is still worth considering for income seekers. It could be in demand when interest rates fall, and cash and bond yields head south. But management needs to drive those earnings.
Taylor Wimpey shares look good value
ChatGPT’s second cheap UK stock pick was housebuilder Taylor Wimpey (LSE: TW). It highlighted a P/E of around eight but I’m seeing 13.3 times. Oh well, it’s closer than the last one.
I bought Taylor Wimpey in 2023 at around six or seven times earnings, and my shares were up 40% in short order. Markets thought housebuilders would benefit from Labour’s plans to build 1.5m homes in five years. Wrong.
The Taylor Wimpey share price is down 18% over 12 months and 42% over five years.
As ChatGPT notes: “Housebuilders have struggled due to high mortgage rates affecting affordability”, while sticky inflation has driven up material and labour costs.
I’d add that Budget-linked National Insurance and minimum wage hikes, due in April, will add to the price burden.
Again, Taylor Wimpey should get a lift when inflation and interest rates show meaningful falls. That should boost sales and prices, cut costs and further tempt investors by slashing returns on cash and bonds. With a trailing yield of 8.3%, Taylor Wimpey should make hay when that happy scenario lands. Patience required.
It’s still well worth considering, for income seekers who can stand a spot of short-term risk. I’ll keep fiddling with ChatGPT (sceptically), and hope next time it tips some cheap shares I don’t own.
