# Finding Winning Investments: The Challenge of Triple-Threat Stocks

Tom Yeung here with today’s Smart Money.

Car manufacturers often face the challenge of combining multiple features into one model. For instance, back in 2011, Nissan aimed to create the world’s “first all-wheel drive crossover convertible.” This vehicle aimed to merge elements of a sedan, SUV, and sports car.

When designers add too much to a single car

The result was the Murano CrossCabriolet, a vehicle so poorly received that it earned CNN’s “most disliked car” award. According to Car and Driver, the SUV elements increased weight and height, leading to a “frightful lack of grip.” A reviewer from Jalopnik commented that with the convertible top up, visibility was so limited you could “can’t see anything smaller than a fire station.” Nissan discontinued the model several years later.

Investment strategies often encounter similar complexities. Successful investors recognize three essential elements: high growth, strong profits, and low purchase prices. Warren Buffett exemplified this when he acquired Apple Inc. (AAPL) in 2016, purchasing shares at just 11X forward earnings. This decision ultimately resulted in an impressive $120 billion profit for his firm.

In 2021, Eric helped investors achieve a staggering 1,350% return in just 11 months through another “triple threat” company—copper and gold miner Freeport-McMoRan Inc. (FCX).

However, identifying stocks that meet all three criteria—growth, profits, and low prices—can be a daunting task. Most companies typically meet only one or two, while those that excel in all three may have hidden issues.

Discovering such “triple-threat” stocks can be immensely rewarding. It’s that moment of realization when the market’s evaluation of a stock appears fundamentally flawed.

Recently, Eric recommended a company to his Fry’s Investment report members. This fast-growing AI stock meets all three criteria. Eric believes that if the company’s identity were hidden, its performance alone would attract buyers.

Before diving deeper into this recommendation, it may be helpful to examine other AI companies that illustrate the challenges of finding triple threats.

The “Single” Threat

Many AI stocks resemble Xometry Inc. (XMTR), which I previously recommended in the InvestorPlace Digest e-letter last March. Although shares have increased by 20% since then, Xometry only fulfills one of the three essential criteria (growth) for top-tier stocks.

Xometry operates a 3D printing marketplace, utilizing AI to connect customers with producers efficiently. A small company seeking custom parts can get instant quotes through Xometry’s platform, which also supports larger businesses seeking cost-effective solutions.

As a result, Xometry has experienced significant growth, with net profits estimated to shift from negative $2 million to positive $13 million this year, potentially doubling again over the next two years.

However, companies like Xometry often struggle with quality and value. Here’s why:

• Quality: Xometry has reported losses since its initial public offering (IPO) in 2021, making it an unattractive option for cautious investors.
• Value: Shares currently trade at 110X forward earnings, which is over five times the S&P 500 average.

This comparison positions Xometry as akin to a Maserati GranTurismo—visually appealing, but with a high price and significant reliability concerns.

Two Out of Three

For insight into a “double” threat, we turn to Arm Holdings PLC (ARM), a British chip designer with a market share that eclipses even Nvidia Corp.’s (NVDA) staggering 90% in GPU-embedded servers.

Arm is a well-established company that designs the processors used in 99% of smartphones. Its chips are critical in devices that prioritize power efficiency, making them essential for laptops, Internet of Things (IoT) gadgets, and self-driving vehicles. Moreover, Arm’s architecture is increasingly utilized in data centers aiming to lower power usage.

The necessity of Arm’s designs translates into substantial royalty income for the firm and its shareholders. Its latest architecture charges a 5% royalty on the final sale price, resulting in impressive returns. For instance, if Apple sells an iPhone 16 Pro for $1,199, that 5% is calculated on the final price, not the approximately $485 manufacturing cost—yielding over 40% returns on invested capital.

Additionally, Arm’s ambitions in AI are fueling its rapid growth, positioning it well within the technological landscape.

Analysts Predict 25% Profit Growth Amid High Prices for AI Stocks

The market is abuzz with news that analysts anticipate an average profit increase of 25% over the next three years for AI accelerators, which power both battery-operated devices and servers. However, this promising outlook comes with a hefty price tag, making stocks like Arm’s susceptible to selloffs.

Currently, shares trade at 61 times forward earnings, which is notably higher than their competitors, such as Xometry. This valuation makes Arm’s stock twice as expensive as Nvidia’s.

On May 7, Arm’s stock took a 12% hit despite beating earnings estimates. Management projected only a 12% sales growth for the next quarter, estimating revenue at $1.05 billion. However, the stock has since recovered two-thirds of its losses.

Given the stock’s current valuation, neither Eric nor I recommend investing in this costly AI “supercar.” It simply doesn’t align well with current market conditions.

Corning Inc.: A Balanced Investment Opportunity

What does a company that “has it all” look like? Consider Corning Inc. (GLW), a holding in Fry’s Investment report.

Founded in 1851, Corning has a legacy of innovation, from inventing Pyrex in 1915 to developing low-loss fiber optic cables and the iPhone’s “Gorilla Glass.” Today, it excels in producing liquid-crystal display (LCD) panels, smartphone screens, and fiber optic cables crucial for broadband connections.

Corning is also a leader in high-end fiber optics for data centers, allowing for increased data transmission in compact environments—a growing necessity for AI-driven operations.

Financially, Corning shows impressive stability, with consistent positive operating earnings over the past two decades and projected return on equity (ROE) poised to reach 17% this year, significantly above market averages. Its shares are currently trading at 19 times forward earnings, which is below the S&P 500 average of 20.2 times.

Concerns do exist, such as potential tariffs affecting exports to the U.S. and possible cuts in public funding for broadband expansion, which have contributed to a 15% decline in shares since February. However, the overall market reaction seems to overlook Corning’s strengths, presenting it as a compelling “buy.”

Notably, 90% of Corning’s U.S. revenues come from products made domestically, and 80% of its sales in China are sourced locally. The anticipated impact of tariffs is expected to be less than $15 million, a minor figure compared to Corning’s $2.8 billion in projected pretax profits this year.

Additionally, Corning plans to establish the first fully U.S.-made solar module supply chain, which could mitigate the impact of proposed tariffs on solar cells, expected to reach as high as 3,500% if approved.

A Second Triple-Threat Company

While Corning’s offerings touch on the AI landscape, a second company in Eric’s portfolio, referred to as the “brown bag” buy, is more directly involved.

As Eric noted in a recent Smart Money edition…

This “brown bag” buy stands in direct competition with Nvidia Corp. (NVDA) in a highly competitive and cyclical industry. Investors have been selling the stock despite excellent operating performance and a strong balance sheet.

The company is rapidly expanding its core operations, particularly its data center division, which almost doubled in revenue last year, making up half of the total company revenue.

This company almost acquired Nvidia in the early 2000s and is a significant supplier of advanced semiconductors, firmly establishing itself in various aspects of AI technology.

Given the current market conditions, the stock’s price has become increasingly attractive.

For those interested in exploring the “triple-threat” investment insights—including Eric’s other picks—you can learn about them through Eric’s free, special broadcast.

Until next week,

Tom Yeung

Markets Analyst, InvestorPlace