2 Stocks to Shield Your Portfolio from AI and Tech Froth

Key Points

• Most experts agree that market valuations are high compared to historical levels. Some believe this means many stocks will fall on their faces.
• Diversifying away from stocks involved in AI and tech can provide insulation from disruptions.
• These stocks offer products and services without direct links to AI, have strong business fundamentals, and have a habit of returning capital.

In the current state of the stock market, investors argue over whether valuations are too high. Some see historical indicators as signs of doom, while others feel that future earnings will justify prices. One interesting metric to look at is the forward price-to-earnings (P/E) ratio of the overall S&P 500 Index. According to Yardeni Research, the figure sits at 22x. It is elevated when looking back over the past 25 years. It only reached similar levels in 2021 and leading up to the dot-com bubble at the start of this century. Over the past 10 years, the figure has averaged around 18x.

Another fear is the high concentration of value in the Magnificent Seven stocks. They account for around a third of the value of the S&P 500. This leads to worries that the market is too reliant on the success of these companies, which are banking so much on winning AI. I’ll highlight two stocks below that can help hedge against the potential market froth that some see.

Philip Morris: Leading the Future of Nicotine

First is Philip Morris International NYSE: PM. The company produces nicotine products, which remain essential purchases for many of its consumers. With AI driving much of the current market, this stock can stay protected from big declines resulting from a change in the tech landscape. Even without being a tech stock, Philip Morris is growing strongly and managed to put up impressive returns in 2024 of 34%. The company's smoke-free nicotine products have been key to its success.

The company’s smoke-free product line includes two main verticals. Heated tobacco is the first. The company sold 136 billion heat sticks in 2024, which consumers use in its flagship IQOS device. This was a 13% increase from a year ago. The other vertical is nicotine pouches, led by its ZYN brand. The company sold 581 million ZYN canisters in 2024 and has a 66% market share in the United States. Next year, it looks to sell 800 million cans, a growth rate of 38%. Revenues grew by 7% in the quarter, and adjusted earnings per share rose 10%. In a legacy industry like tobacco, these figures are highly impressive.

Overall, Philip Morris is the clear leader in multiple key parts of the smoke-free tobacco market, the future of its industry. Traditionally, this industry can thrive, even when markets are down. The company’s leading position makes it a good play for the upside, and its industry provides downside protection from AI-related disruptions. It is trading at a forward P/E multiple of 21, nearly in line with the market. However, its tangible and impressive results justify this. Its nearly 4% dividend yield is also an extremely nice bonus.

Exxon Mobil: Cash Cow Working to Guard Against a Fall in Oil

Exxon Mobil NYSE: XOM is the world's largest oil and gas company, excluding Saudi Aramco, which remains primarily state-owned. The energy sector is certainly more cyclical than others, as demonstrated by the stock’s beta of nearly 0.9. However, Exxon Mobil still trades at a largely depressed forward P/E multiple compared to the overall market of 15x. Compared to the energy market, its valuation is only moderately above average. However, Exxon has some strong characteristics in its business that help keep the stock attractive.

First is its $55 billion in cash from operations, the highest among all oil and gas companies in the United States, Europe, and Latin America. Exxon also provides a strong balance of returning capital to its investors while investing back into the business. Its $24 billion in capital expenditure over the last 12 months is 24% higher than the closest company in this peer group, Shell NYSE: SHEL. It also delivers a strong yield of nearly 8% when combining dividends and buybacks. It is doing this all while oil and gas prices are sitting moderately below their average over the past 20 years. Even if Brent crude prices drop 26% to $55, the company can still pay its current dividend and fund all capital projects.

It would also accumulate nearly $100 billion in extra cash through 2030, which it could return to shareholders. It plans to have this ability by making investments to decrease its breakeven per barrel price to $30 by 2030. Overall, the company's essential product, oil, isn't going away anytime soon. It could provide a reasonable place to hide if fear starts to grip the market. Still, the price of oil and gas will have a big impact on the stock.