Risk analysis with ChatGPT

As the global economy faces increasing uncertainty, marked by events like the Dow plunging 2200 points due to tariff turmoil and the IMF warning of an economic slowdown, fears of stagflation – a combination of higher prices and unemployment – are growing. This environment has many investors wondering how to protect their portfolios. While traditional methods of finding recession-proof stocks often involve extensive research, a new approach involves leveraging artificial intelligence (AI) tools like ChatGPT, Gemini, and Bard to gain an edge.

The goal is to find stocks that could not only survive but potentially thrive during a recessionary period. However, the effectiveness of AI in this context largely depends on how you ask the questions.

The Pitfall of Broad Prompts

Initially, the approach might seem straightforward: simply ask for “the safest stocks to own during a recession”. However, as experience shows, this broad prompt leads to equally broad answers. For instance, when given this query, Gemini provided general defensive sectors like consumer staples, healthcare, and utilities, along with key characteristics of recession-proof stocks, but no specific company recommendations. ChatGPT wasn’t much better, responding with clarifying questions, which highlighted the prompt’s lack of specificity.

The key lesson here is crucial: when using AI tools, we must not suspend our critical thinking. These tools can make us significantly better investors, but only if we ask them smart, focused questions.

Striking Gold with Specificity

To get actionable insights, the prompts need to be refined. Instead of asking for general “safe” stocks, the queries were tailored to reflect past performance and specific economic scenarios.

One effective prompt was: “Which stocks performed well during the 2020 recession?”. This query yielded interesting names like Netflix, Amazon, Nvidia, and Microsoft, alongside more expected ones like Gilead Sciences and Regeneron Pharmaceuticals. This also brought an important realization: each recession is unique, driven by different factors, and these factors can present different opportunities.

Understanding that a generic “recession-proof” stock might not perform consistently across different economic downturns led to an even more targeted prompt: “What stocks outside of the traditional safe sectors might do well in a tariff induced recession?”. This specific question, linked to the current economic climate, provided some surprising and valuable picks that go beyond the usual suspects.

AI’s Surprising Picks for a Tariff-Induced Recession

The AI tools, when prompted effectively, identified three stocks with strong resilience and potential during an economic downturn, particularly one influenced by tariffs:

Coca-Cola (KO)

While a consumer staple and thus somewhat expected, its inclusion is justified by its consistent performance. Coca-Cola has demonstrated consistent revenue growth, even through the 2008 and 2020 recessions. It boasts strong free cash flow, projected at $4.7 billion in 2024, and its price-to-earnings ratio is aligned with its 10-year average. A remarkable point is its 64 consecutive years of dividend increases. Its operations span over 200 countries, insulating it from economic circumstances in any single nation, and it offers a diverse product range beyond just beverages, including snacks and meals. Year-to-date, Coca-Cola has significantly outperformed the market, rising nearly 17% while the broader market declined about 6%.

Netflix (NFLX)

This pick is particularly interesting because it falls into the consumer discretionary sector, not typically considered a core “recession-proof” area. However, Netflix has built a track record of resilience in past recessions. During the 2008 financial crisis, it was up 12.5% while the S&P 500 was down 38.5%, showcasing a 50% outperformance. In 2020, it gained 65% when the S&P returned about 18%. The company continues to show strong fundamentals with revenue and net income growth rates of 16% and 18% respectively, robust cash flow of $1.38 billion, and approximately $10 billion in cash on hand. Although it doesn’t pay a dividend, its growth rates make it an attractive option for investors looking to own the stock through a recession. Netflix is up 24% year-to-date, contrasting with the S&P’s roughly 6% decline.

T-Mobile (TMUS)

Often overlooked in traditional “safe” sectors, T-Mobile could almost be considered a utility given how indispensable phone service has become in daily life – for work, learning, and business. The company demonstrates strong cash flows, pays a dividend, and has continued its growth by expanding its fiber optic networks. Historically, T-Mobile outperformed the S&P 500 during the 2008-2009 recession (being down less than the S&P’s 38% decline) and was significantly up during the COVID-19 pandemic period when the S&P was up around 43%. It continues to show resilience this year, up about 8% while the S&P is down 6%.

 

Key Takeaways for Investors:

It’s important to remember that finding truly recession-proof stocks is very difficult. While these stocks may outperform the broader market, it doesn’t mean they won’t experience some decline. For instance, even historically stable companies like Johnson & Johnson and Proctor & Gamble saw their stocks go down during the 2007-2009 market downturn, albeit less than the overall market. The stock market inherently involves risk, and recognizing the chance of losing some capital is vital.

Ultimately, AI tools serve as powerful assistants to accelerate your analysis, helping you identify businesses that align with your investment goals.

How to Replicate This Analysis

You can apply this method to your own portfolio analysis:

• Start with broad questions to get an initial sense of the landscape.
• Filter the results based on specific criteria like past performance, sector relevance, and financial strength.
• Test your refined prompts across multiple AI tools to compare their responses.
• Look for overlap and divergence in the AI’s suggestions.
• Always ask yourself critical questions about the data and the recommendations.

By combining the analytical power of AI with your own informed judgment, you can make more strategic investment decisions, even in uncertain economic times.