The S&P 500 is the benchmark US index and therefore contains hundreds of different stocks to consider buying.
However, for investors searching for hidden gems, the index probably isn’t the place to be. That’s because companies have to be a certain size and meet specific criteria for inclusion, including being profitable.
Two stocks tipped to soon join the S&P 500 are software firm AppLovin and trading app Robinhood. These already have hefty market caps of $130bn and $65bn, respectively, after year-to-date rises of 19% and 97%.
While there’s nothing stopping them becoming even larger in future, they’re hardly under the radar any longer. In fact, they would be the fifth- and fourteenth-largest constituents of the FTSE 100 if listed in London!
In my quest to find a potential hidden gem, I turned to artificial intelligence (AI) in the form of ChatGPT. I asked it to name two US firms with market caps between $1bn and $20bn that could one day join the S&P 500 (and therefore likely produce market-thumping returns).
Here’s what the AI bot said…
Shoals
The first stock it rattled off was Shoals Technologies Group (NASDAQ: SHLS), a solar energy company that was new to me.
ChatGPT reckons this might be a hidden gem because it’s not a panel maker, but a provider of electrical balance-of-system components critical to solar farms. It is “profitable and cash-flow generative with a scalable, asset-light model”. Sounds good.
However, it said the renewable energy firm has a market cap of around $2bn. Putting aside the fact that this is wrong — Shoals’ market cap is just $852m — I’m not convinced it’s set to enjoy “strong tailwinds from the Inflation Reduction Act“.
Indeed, this legislation, which heavily focuses on green energy subsidies, looks much less safe with President Trump in office. This is not an industry I want to invest in.
Stock number two
The second share was a bit more interesting to me, namely restaurant software firm Olo (NYSE: OLO). It “powers digital ordering and delivery logistics for restaurant chains like Wingstop and Shake Shack“.
ChatGPT says Olo has highly recurring revenues and a “lean” balance sheet. These are things I like to see in an investment.
However, it completely fails to mention that Olo ended 2024 with less restaurant locations (86,000) than it had in 2022 (87,000). As far as I can tell, this largely relates to the loss of a key customer — Wingstop! — in 2023.
Perhaps this explains why the stock is down 70% since IPO in 2021, and why reports suggest it might be open to a possible sale.
Of course, an acquisition could produce decent results from today’s $8 share price, assuming it doesn’t fall further before that happens.
But it doesn’t inspire me with confidence that Olo is heading to the S&P 500 at any point. From its $1.5bn market cap, it would have to rise at least 20 times in value to have any realistic chance of joining the index. I don’t see that happening.
I already have shares in rival Toast — which is up 93% in the past year — so I’m not interested in Olo stock.
Not great picks
Stepping back, I’m pretty disappointed by ChatGPT’s selections here. I back my own human intelligence to find more promising growth stocks than these.
