Generative artificial intelligence (AI) has been a game-changer for businesses everywhere, and many AI-related stocks have been crushing the market. The most well-known one is probably Nvidia, which is up 233% over the past year alone. But investors shouldn't fill their portfolios solely with AI stocks.
Over time, a diversified portfolio typically leads to the best results -- and you don't need to give up on high performance in doing so. For example, you might not realize it, but many apparel shares have been doing amazingly well lately. This industry faced a host of challenges over the past few years, including changing trends and inflation. But it is now on the upswing.
Companies like The Gap(NYSE: GPS), American Eagle Outfitters(NYSE: AEO), Abercrombie & Fitch(NYSE: ANF), and Urban Outfitters(NASDAQ: URBN) have handsomely outperformed the market over the past year. Let's see why -- and whether this could continue.
Fashion is back in fashion
These companies are top fashion retailers, and fashion is back in fashion. Trends had shifted toward basics and athleisure when the pandemic started, and officewear fell by the wayside. Now, office apparel is making a comeback, but fashion is where the major shift is; people care how they look again.
The Gap recently went through a string of CEOs, culminating in the hiring of Richard Dickson away from his COO role at Mattel last year. He was credited for much of the turnaround at the toy company, and so far, it looks like he might be reigniting sales at Gap.
One thing that's different so far under his tenure is the development of a strong focus for each of Gap's four brands: Gap, Old Navy, Banana Republic, and Athleta. Gap gained market share in 2023 and reported a 1% sales increase.
Teen favorite American Eagle Outfitters has been demonstrating strong performance despite inflation. Sales increased 12% year over year in its fiscal 2023 fourth quarter, which ended Feb. 3. Its Aerie women's brand has been a particular hit and has incredible opportunity. Management sees what it called a "clear path" to about $6 billion in sales over the next three years, up from $5.3 billion in 2023.
Urban Outfitters and Abercrombie & Fitch are also demonstrating strong growth. Abercrombie's sales increased 21% year over year in fiscal Q4, and earnings per share almost quadrupled. It reported its highest operating margin in 15 years. It's no wonder the stock shot higher, but even in the wake of those gains, it trades at a cheap price-to-earnings ratio of 18.
Buy what you know
Another point to consider is that the more you understand what a company does, the higher is the likelihood of your success if you choose to invest in it.
If you buy hot AI stocks simply because everyone else is, or even because they've skyrocketed recently, you run the risk of picking ones with weak fundamentals, or buying and selling at the wrong time. Investors who understand more about the tech behind AI and how strong a company's business is will know which ones can provide long-term value and when it might be right time to sell. Investors who don't might buy such stocks near their peaks, and then end up with losing investments.
If clothing or fashion is more in your wheelhouse, that could be a much better investment for you. If you know where everyone is shopping, that could make you a better candidate to explain the investing thesis for the company than some Wall Street analysts can offer.
Choosing a group of high-growth tech stocks along with other stocks you know and love could lead to long-term investing success -- and fashion stocks are gaining ground right now.
Should you invest $1,000 in Gap right now?
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends American Eagle Outfitters. The Motley Fool has a disclosure policy.
