Not sure what to think about AI? Check out these FTSE 250 gems

For UK investors unsure about what to make of artificial intelligence (AI), the FTSE 250 is worth a look. There are a lot of businesses there that I think might be well-protected from AI disruption.

There are good reasons to be uncertain about AI winners and losers. But investors in general should consider adding some diversification to their portfolios, rather than just taking a side.

AI outcomes

I’m sceptical of anyone who claims to know with certainty what AI is going to mean for businesses over the long term. Moving share prices might present opportunities, but there’s inevitably risk.

One example that stands out to me is Experian (LSE:EXPN). The FTSE 100 company makes money by selling credit scores to lenders that helps them assess potential borrowers.

The risk is that AI might be able to allow banks to run their own assessments. That would significantly reduce their dependence on Experian and limit its ability to increase prices.

This, however, wouldn’t be entirely straightforward. Experian has a huge database that is virtually impossible for a newcomer to replicate and this should make its outputs more accurate and reliable.

The question, though, is whether lenders will care. For something like a mortgage, the risk is huge, but that’s only a small part of the business and the risk is much lower with payday loans or credit cards. 

With the stock down 36% in the last 12 months, I think it might be worth considering. But there’s a lot of uncertainty that investors need to be prepared to cope with going forward.

Away from AI

A bit further away from the cutting edge of AI, there are some interesting businesses in the FTSE 250. Two that stand out to me are Greggs and JD Wetherspoon. 

Importantly, both companies have strengths that give them unique advantages over competitors. If a business doesn’t have this, it’s hard to see it as a good long-term investment opportunity.

Both companies use their massive scale to generate cost advantages. And rather than using these to boost their own margins, they use them to keep prices down for customers.

That makes them a nightmare for competitors. It’s virtually impossible to make any money by selling sausage rolls for less than Greggs or pints for less than JD Wetherspoon. 

Could this be disrupted by AI? Maybe – if it results in significant job losses, consumers might have to pull back their spending and this could cause demand to fall. 

My sense, though, is that value choices are ones that people might find themselves trading down to. And I don’t think anything has an appeal that’s as durable as offering customers low prices.

What to invest in?

AI has been the stock market’s main theme recently – and with good reason. But investors don’t have to get involved in every emerging opportunity, especially when they’re hard to assess.

There are lots of quality businesses that are much more straightforward. And that simplicity doesn’t have to come at the expense of quality. 

So the question for investors is why not take a look at the likes of Greggs and JD Wetherspoon? Whatever happens with ChatGPT, my guess is they’re going to be around for a long time.

The post Not sure what to think about AI? Check out these FTSE 250 gems appeared first on The Motley Fool UK.

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Stephen Wright has positions in J D Wetherspoon Plc. The Motley Fool UK has recommended Experian Plc and Greggs Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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