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Since I turned 50, my focus has been on FTSE dividend stocks, but I also keep an eye out for growth opportunities.
I see a growth stock basically as a firm with strong potential for above-average revenue and earnings expansion.
I already hold several examples, but I was curious to see ChatGPT’s picks.
So, what did it say?
A curveball opener
Its top pick was FTSE 100 miner Fresnillo (LSE: FRES) — a curveball for me. While it mines for several metals, its focus is on silver and gold. I have always regarded both as speculative plays, too close to gambling for my taste.
To be fair, ChatGPT did point out the high risk that comes from precious metals price volatility. But its view leaned on big price gains over the past year, while I am more concerned with future earnings growth.
According to my analysis, Fresnillo’s earnings are forecast to grow 34.7% a year to end-2027. Overall, then, a good earnings growth prospect, but a very risky one in my opinion.
Defence giant next up
ChatGPT’s second pick looked a better all-around choice to me — FTSE 100 defence giant Babcock International Group (LSE: BAB).
The artificial intelligence platform provided some solid – if basic – analysis of key drivers for the business. It said: “Growth is backed by rising defence and engineering demand.”
It also implied an undervaluation to its peers: “Babcock offers a compelling yet still relatively under-the-radar opportunity versus big blue-chips.”
My discounted cash flow valuation for the firm shows it is 17% undervalued. But this margin could vanish in any high market volatility.
ChatGPT also failed to mention any risk in the stock. I think a key one is a fault in any of its key systems, which could dent its earnings growth.
Analysts forecast its earnings growth to be 6.6% a year to end-2027. And this would not make it a legitimate growth stock to me.
IT powerhouse
ChatGPT’s final choice was FTSE 250 IT reseller and IT infrastructure solutions provider Softcat (LSE: SCT).
It cited the firm’s position in the high-growth IT services, cloud, and cybersecurity sector as a key growth driver.
But that was it, aside from saying that as a mid-cap, Softcat is more volatile than large-cap names. This observation is sort of true, but not necessarily – it depends on individual company fundamentals.
A more specific risk for the firm, I think, is the high degree of competition in its sector, which could squeeze earnings.
Talking of which – and ChatGPT did not, again – Softcat’s earnings are forecast to rise by 8.9% a year to end-2027. Like Babcock’s, this is not sufficiently high for me to consider it a major growth stock opportunity.
My take on the picks
Broadly, none of the stocks chosen were outright bad, although one (Fresnillo) was questionable in my view.
More specifically, ChatGPT seemed much more focused on past price gains than on what might power future ones. This should also have included earnings growth forecasts and valuations based on discounted cash flow that factor these in.
I also thought its risk assessment of each was not specific enough.
So, I will stick with my own methodology to pick growth stocks. And I have some excellent candidates in view now.
