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AI Stocks Are Totally Overheated: Here’s What to Buy Instead

Businessman holding AI cloud
Image source: Getty Images

Written by Andrew Button at The Motley Fool Canada

Artificial intelligence (AI) stocks were all the rage earlier this year. From the start of the year to the peak, the NASDAQ-100 index rallied 40%! It was not a big enough rally to take the index back to its 2021 highs, but it was substantial. Those who bought the lows in 2022 made off like bandits!

However, the AI hype seems to be fading now. ChatGPT’s web traffic is down, having fallen for three consecutive months. AI stocks, too, are taking a beating.

Consider NVIDIA (NASDAQ:NVDA). In many ways, it was the biggest beneficiary of the tech stock mania seen earlier this year. As the supplier of chips to the AI industry, it made a lot of money in the second quarter, and its stock rallied in the months leading up to its release. However, even though NVDA’s Q2 release was a large beat, NVIDIA started falling after earnings came out. Today, its stock is down 14% from its level on the day earnings came out.

It’s no surprise why this is happening: AI stocks are just getting very expensive. People bought them so heavily that they’ve now started to take profits, as you’d expect. In this market, you’d want to buy something cheaper than AI stocks, as such stocks still have room to run. In this article, I will make the case that dividend-paying, “passive-income” stocks are better buys than AI-driven tech stocks today.

Some good passive-income stocks to consider

Canadian bank stocks are among the best passive-income opportunities today, because they’re fairly cheap and reasonably well regulated. Consider Royal Bank of Canada (TSX:RY), for example. It’s a big TSX bank with a 4.5% dividend yield. It has paid its dividend without interruption for over 100 years. It has stood the test of time. This year, the company enjoys tailwinds that could take its earnings higher, leading to dividend hikes. For example, interest rates are rising, which could lead to Royal Bank collecting more interest income on the loans it issues.

Or, if you prefer, look at Suncor Energy (TSX:SU). It’s an oil and gas stock that is currently benefiting from rising oil prices. In mid-2022, when oil prices were very high, Suncor delivered windfall profits, with large increases in revenue, net income, diluted earnings per share, and free cash flow. Today, oil prices are high once again, so Suncor has the potential to deliver rising earnings for the third quarter as well. If it does so, its stock will likely rally.

The company might even increase its dividend if it thinks that the high oil prices we’re now seeing will last long term. So, Suncor Energy, which trades at a mere 7.6 times earnings, may be a better buy than the richly valued tech stocks everybody is clamouring to buy this year.

Foolish takeaway

In the markets, hindsight is always 20/20. What looked like an obvious good investment in the rearview mirror may not have been so obvious to those who had the chance to buy it early. Nevertheless, there is a tendency for stocks that are out of favour in one year to rise in the next. So, passive-income stocks may be more appealing buys than AI stocks today.

The post AI Stocks Are Totally Overheated: Here’s What to Buy Instead appeared first on The Motley Fool Canada.

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Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Nvidia. The Motley Fool has a disclosure policy.