I can’t believe ChatGPT picked these 3 growth stocks as its top choices…

Growth stocks are typically defined as companies with higher-than-average earnings growth and a high return on equity (ROE). Unlike income stocks, they focus on reinvesting funds into the business rather than rewarding shareholders.

Identifying stocks with decent growth potential can be more difficult than income stocks, as they donât offer a strong indication of returns, like dividends. Choosing the best ones requires an extensive understanding of global market trends and careful analysis of company financials.

Recently, London Stock Exchange Group announced it was working with Anthropic to bring financial data access to its artificial intelligence (AI) platform, Claude. That gave me an idea: could AI pick decent growth stocks?

I decided to find out.

Testing the field

To get a more varied answer, I asked several AI platforms. Since ChatGPT’s the best-known, I started there.

Shockingly, it decided to go all in on semi-conductor chips, picking Nvidia, AMD and ASML. While they may all be decent choices, picking three stocks in the same industry goes against the number-one rule of smart investing: diversification.

Next, I gave Claude a go. Its answer was arguably even riskier: Palantir, ARM and Coinbase. The first two have eye-wateringly high valuations and the second relies heavily on the success of crypto. No thanks.

Exasperated, I tried one more time, with Gemini. Seemingly stuck in the same trend, it suggested Nvidia, Super Micro Computer and Palantir.

So I gave up. Is AI biased towards semi-conductor chips? Quite possibly.

None of the above companies are necessarily bad picks. But at best, theyâre too obvious, and at worst, they lack diversification and a long-term investment thesis.

At the end of the day, I came to a realisation: AI was unlikely to tell me anything I couldnât find with a quick Google search.

So what’s a good growth stock?

That depends on who one asks. Risk-tolerant day traders looking to make a quick buck might agree with AIâs picks. But I think smart investors with a long-term outlook should be more discerning.

More conservative investors may want to consider one of Warren Buffettâs long-term holdings, Mastercard (NYSE: MA).

The card company’s shown mixed performance recently, with its share price up around 9% over the past year. However, the longer-term picture looks far more impressive, up 445% over the past decade â an annualised return of about 18.5% a year.

The companyâs fundamentals remain strong, boasting a ROE of 185.7% and a net margin of 45.2%, highlighting its exceptional profitability. Its valuation’s fairly reasonable for a growth stock, trading at a forward price-to-earnings (P/E) ratio of around 33.

However, emerging fintech challengers could pose a risk and steal some of its market share. The card payments market’s already saturated, so new customers must be retained.

Still, Mastercard seems unlikely to fade away any time soon given its entrenched role in everyday commerce.

Bottom line

Growth stocks can be exciting, but they’re not for the faint-hearted. Diversification’s key to reducing risk and slow, steady growth’s usually better than rapid, short-term growth.

Establishing a long-term mindset focused on quality and sustainable earnings growth is usually better than chasing the next hot tip from AI.

The post I canât believe ChatGPT picked these 3 growth stocks as its top choicesâ¦ appeared first on The Motley Fool UK.

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Mark Hartley has positions in Super Micro Computer. The Motley Fool UK has recommended ASML, Advanced Micro Devices, Alphabet, Mastercard, and Nvidia. 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.