Welcome to this week's edition of The AI Equity Update. We're breaking down key market trends and evaluating some solid stocks with AI ties. Let's get into it.
What You'll Get Every Week
Macro Trends in One Quick Graph: A snapshot of big-picture economic signals and how they might affect stocks.
How to Understand Our Efficiency Score: A quick guide to our rating system for capital efficiency.
Stock Evaluations: In-depth looks at 4-5 AI-related stocks, with actionable plans.
Quick Portfolio Overview: Summary table of the stocks we covered.
Macro Trends
The U.S. economy shows mixed signals amid ongoing trade tensions. The yield curve spread (10-year minus 2-year Treasury yields) stands at 0.58%. indicating a normal curve and potential for growth, though it's narrower than historical averages. The effective federal funds rate is at 4.33%. reflecting a steady but elevated stance from the Fed, which could keep borrowing costs high for businesses. High-yield credit spreads (ICE BofA US High Yield OAS) are at 2.89%. suggesting moderate risk appetite but vulnerability to shocks. Real GDP grew 2.9% annualized in Q2 2025. a solid pace driven by consumer spending. Unemployment held at 4.2% in July. remaining low and supportive of wage growth. CPI inflation was 2.7% year-over-year in July. cooling but above the Fed's 2% target.
Recent news highlights extension of tariff truce with China by 90 days. but new tariffs announced by Trump on various partners. potentially raising costs. The trade deficit narrowed to $60.2 billion in June. the lowest since September 2023. These factors could raise costs for AI-dependent firms (e.g., hardware for Meta), squeeze margins in medtech (Medtronic), impact bank lending (M&T Bank), but benefit defense (Northrop Grumman) via policy shifts. Overall, steady macros support stocks, but tariff risks may pressure valuations—watch for Fed cuts.
How to Understand Our Efficiency Score
Our Efficiency Score measures how well a stock or option uses capital, based on expected return, risk, liquidity, and portfolio fit. It's normalized against peers and scored in bands:
Score Range | Band |
|---|---|
>3 | Top-decile |
1.5–3 | Good |
1–1.5 | Marginal |
<1 | Inefficient |
Higher scores mean better efficiency, favoring options like LEAPs for upside with less capital.
Stock Evaluations
Medtronic (MDT): Leading MedTech Innovator
Key Stats:
Revenue: $33.5B in FY25, up from prior year.
Dividend: $2.84 annualized, yielding about 3%.
Balance Sheet: Current ratio 1.85x, total debt $28.5B.
Efficiency Score: Marginal (Equity), Good (LEAP).
The Story: Medtronic is a global leader in medical technology, offering devices for cardiovascular, neuroscience, surgical, and diabetes care. In FY25, it generated $33.5B in sales with strong organic growth, but faces challenges like pricing pressures in China and regulatory hurdles. Strengths include a diverse portfolio and innovation in premium products; weaknesses are elevated P/E at 25x and debt levels, failing strict value screens like Graham's.
Recent Q4 showed 5.4% organic revenue growth and plans to spin off diabetes business, boosting focus. Overall, a stable franchise but trading at fair value.
What Could Spark a Rise:
Successful diabetes business separation via IPO/split-off, unlocking value.
FY26 guidance of 5% growth and $5.50+ EPS amid procedure volume recovery.
Mix shift to innovative products offsetting tariff impacts.
Action Plan:
Price Range | What to Do with Stocks | Options Idea | Max Portfolio Weight |
|---|---|---|---|
≤ $85 | Buy | Sell cash-secured puts (delta ~0.25) | 5% |
$85–$90 | Accumulate | Covered calls 1–2% OTM | 5% |
$90–$100 | Hold | Collar if vol spikes | 5% |
≥ $105 | Trim | Tighten collars | 5% |
Fair Value: $85–$105. From current price of $93.02, upside of about 1% to midpoint ($94).
M&T Bank (MTB): Regional Banking Stalwart
Key Stats:
NIM: 3.62% in Q2'25, with CET1 at 10.98%.
Dividend: $5.40 annualized, yielding ~2.8%.
Book Value: BVPS $166.94, TBVPS $112.48.
Efficiency Score: Inefficient (Equity and LEAP).
The Story: M&T Bank is a mid-sized regional bank focused on commercial lending and deposits in the Northeast and Mid-Atlantic. Q2'25 saw net income of $716M and EPS $4.24, with stable credit and heavy buybacks. Strengths: Solid capital (CET1 11%) and efficiency (55.2%); weaknesses: NIM compression from rates and CRE exposure, screening inefficient on capital use.
It's reasonably valued at 12.5x P/E but lacks upside without dips, amid rate and regulatory risks.
What Could Spark a Rise:
NIM stabilization or rebound from asset repricing.
Continued buybacks and SCB reduction to 2.7%.
Credit quality holding firm in CRE portfolio.
Action Plan:
Price Range | What to Do with Stocks | Options Idea | Max Portfolio Weight |
|---|---|---|---|
≤ $180 | Add core equity | Write Jan'26 $205–$210 covered calls | 4% |
$180–$205 | Hold/DRIP | 3–6-mo CC ladder around $205 | 4% |
≥ $210 | Trim or collar | Sell $210–$220 calls, buy ~$180 puts | 4% |
Fair Value: $185–$205. From current price of $190.07, upside of about 3% to midpoint ($195).
Meta Platforms (META): AI-Powered Social Giant
Key Stats:
Revenue: $47.52B in Q2'25, up 21% y/y.
Dividend: $2.10 annualized, yielding ~0.27%.
Balance Sheet: Net cash position, capex guide $66–72B.
Efficiency Score: Marginal (Equity), Inefficient (LEAP call).
The Story: Meta owns Facebook, Instagram, WhatsApp, and invests heavily in AI and metaverse. Q2'25 showed strong ad growth (+21%) and operating leverage, with net income $18.34B. Strengths: 3.28B daily users, AI-driven ads; weaknesses: High capex ($66B+ FY25) and Reality Labs losses (-$8.74B 1H25), trading at 29x P/E.
It's cash-rich but valuation fair-to-rich amid regulatory scrutiny.
What Could Spark a Rise:
AI capex yielding better ad ROI and monetization.
Buybacks ($23B YTD) and dividend supporting returns.
Durability in ad volumes/pricing (+10% each).
Action Plan:
Price Range | What to Do with Stocks | Options Idea | Max Portfolio Weight |
|---|---|---|---|
≤ $760 | Buy/Accumulate | Structured Jun'27 verticals/diagonals | 6% |
$760–$820 | Measured accumulate | 12–18m call spreads | 6% |
$820–$900 | Hold/Trim | Covered-call overwrites (10–15Δ) | 6% |
≥ $900 | Trim/Hedge | Collars | 6% |
Fair Value: $760–$920. From current price of $785.23, upside of about 7% to midpoint ($840).
Northrop Grumman (NOC): Defense Tech Powerhouse
Key Stats:
Sales: $10.351B in Q2'25, up 1.3% y/y.
Dividend: $9.24 annualized, yielding ~1.58%.
Backlog: $89.7B, with 40% in next 12 months.
Efficiency Score: Marginal (Equity), Top-decile (LEAP).
The Story: Northrop builds aircraft, missiles, and space systems for defense. Q2'25 EPS $8.15 aided by asset sale, with strong backlog but B-21 losses. Strengths: Visibility from contracts, program wins; weaknesses: High P/E 21.8x, leverage, not passing value tests.
Quality at full price, with LEAPs efficient for exposure.
What Could Spark a Rise:
B-21 LRIP progress and Sentinel EAC gains.
Backlog conversion amid DoD budget priorities.
Awards in space/missiles boosting visibility.
Action Plan:
Price Range | What to Do with Stocks | Options Idea | Max Portfolio Weight |
|---|---|---|---|
≤ $560 | Buy | Initiate Jan'27 covered calls (640–660) | 5% |
$560–$600 | Accumulate | Partial collar on risks | 5% |
$600–$630 | Hold/Overwrite | Jan'27 vertical (560/640) | 5% |
> $630 | Trim | Recycle to LEAPs | 5% |
Fair Value: $560–$620. From current price of $583.96, upside of about 1% to midpoint ($590).
Quick Portfolio Overview
Stock | Ticker | Efficiency Score | Fair Value Range | Upside to Midpoint |
|---|---|---|---|---|
Medtronic | MDT | Marginal (Equity) | $85–$105 | 1% |
M&T Bank | MTB | Inefficient | $185–$205 | 3% |
Meta Platforms | META | Marginal (Equity) | $760–$920 | 7% |
Northrop Grumman | NOC | Marginal (Equity) | $560–$620 | 1% |
Weighted Expected Return (to Midpoint, based on max weights): 3.2%
Interested in have a company researched for the next newsletter? Send us a suggestion using the button below!
Important Legal Notices and Disclaimers
The information in this newsletter is for informational purposes only and does not constitute investment advice, financial advice, trading advice, or any other sort of advice. Past performance is not indicative of future results. All investments involve risk, including the possible loss of capital. You should do your own research and consult with a qualified financial advisor before making any investment decisions. We are not responsible for any losses incurred based on this content.
Know someone who'd love this? Forward this email or use this website link.