By: Jeff Yastine — June 4, 2021
This Chip Maker Is Set to Hand Us A Double-Digit Return
I’m jealous of my son and his computer.
He’s at that age where using a “good enough” family computer really doesn’t cut it anymore.
That’s especially true when you want to play the most complicated games on a PC that processes at lightning speed and brag to your buddies about it.
I was a kid once, so I get it...
And I told my son that if he paid for half from his lawnmower earnings, I’d front the rest.
So just before the pandemic last year, we ordered an entire setup for him complete with a processor chip, graphics card, and metal see-through cabinet.
He assembled it all (which was cool to see), uploaded the operating system, then booted up the programs. The applications loaded faster than you could say “plug-and-play.”
Now I want one too!
Besides supply and manufacturing disruptions of the pandemic, and the chaotic reopening of the global economy, there’s also a global shortage of high-performance gaming chips.
One tech site found that the value of these chips has more than tripled in some cases over the last 6 months.
In December, a GPU might have listed for $700, but its eBay “street value” was $1,200. By March, the same chip cost $2,100.
That’s an ouch! to my pocketbook. I guess I’ll make do with my Lenovo PC for a while longer.
But in typical Peter Lynch “buy-what-you-know” fashion, I think there’s an investing idea in all this.
With all the talk about supply and demand and rising prices for commodities, we can basically lump semiconductors into that category.
And, looking at Sector Prophets Pro Sector Relative Strength Matrix, the investment opportunity is obvious. Below is a snapshot of the premium data platform.
Sector Relative Strength Matrix
As you can tell, the semis are ranked #7 out of the 45 sectors we monitor.
(Click any image to enlarge)
The technology sub-sector is also in a column of X’s and on a point-and-figure “Buy” signal on its Bullish Percent Index (BPI) chart. So, the bulls are in control over the short- and intermediate-terms.
With just 62.5% of stocks in the sector on “Buy” signals, the sector has room to run before reaching overbought territory. That’s a far cry from February when 88% of stocks in the sector were on “Buy” signals.
This tells us that much of the selling has run its course and risk is low for investing in Semiconductors.
Semiconductors BPI Chart
The sector’s Relative Strength (RS) chart, below, is also in a column of X’s. That garners a Sector RS rating of Strong when measured against the Equal Weighted S&P 500.
Sector Relative Strength Chart
So the sector’s technicals look good.
And Nvidia (NVDA) is a company ideally positioned to benefit from the screaming global demand -- and ongoing shortages -- for high-performance chips these days.
Founded in 1993, Nvidia has come a long way since its first-ever graphics chip. The NV1 handled sophisticated video imaging and audio processing with ease.
Today, Nvidia’s top-of-the-line and highly-sophisticated Turing chips provide the horsepower behind Artificial Intelligence, among other smart technologies.
That makes Nvidia’s chips high on the list of priorities for everyone -- PC makers, gamers, and of late, so-called “miners” of cryptocurrencies like Bitcoin.
The company recently reported its Q1 results, earning $3.66 a share -- 37 cents more than analysts expected. In fact, it was the 23rd quarter in a row of positive earnings surprises for the company.
Nvidia is on track to earn $13.63 a share in profits for 2021, 40% more than last year.
Here’s how NVDA looks in the Position Key (another premium research tool that comes with Sector Prophets Pro).
See the four blue arrows? Those give us some important facts. from left to right we see that...
- The Semiconductor sector is on Bull alert status, an early indication that demand is returning to a sector.
- The sector is on a “Buy” signal.
- Nvidia’s stock is strong relative to its peers in the sector.
- The stock is strong when compared against the broad market.
With those kinds of marks, it’s no wonder the stock is up 30% year-to-date. And it’s risen 97% over the past 12 months.
NVDA Price Chart
Despite almost doubling in a year, I think Nvidia’s stock still has the legs for an additional 10%, or a $750 share price by the end of August.
For one, the company has a 4-for-1 stock split scheduled for July 20.
Stock splits don’t do anything to help or hurt shareholders in reality. It’s really just slicing the pizza into smaller pieces.
But splits do help their associated stocks by 1) attracting the attention of investors, and 2) by making the stock seem more attractive because of its new lower price.
Also, Nvidia reports its second quarter results in mid-August. Analysts expect the company to earn $4.08 a share for the period. But given the global demand for chips and widespread shortages, the company will likely top Wall Street’s estimates for the 24th straight quarter.
The company could also get an unexpected boost from a recent tweak to its chip lineup. It is making a stripped-down version of its gaming processors specifically for crypto-mining operations.
The chip eliminates all the gaming-related design facets, while keeping the horsepower needed to unravel the cryptographic secrets that unlock more Bitcoin, Ethereum and other crypto coins.
Given Nvidia’s $678 stock price (not cheap), it’s an excellent candidate for a stock replacement strategy.
So rather than laying out $67,800 for a 100-share position, you can buy the November 580 Strike Call Option for $131.65.
This option has a delta of 75 (perfect) and 169 days to expiration.
Have a great weekend!
Guest Editor, True Market Insiders