Over the last week, Micron Technologies, Inc. (MU) and Nvidia Corporation (NVDA) have both seen positive comments and price upgrades from Wall Street firms. While it seems like it should generate buying opportunities for both, the truth is that one is a clear buy and the other a sell.
The semiconductor sector has seen more than its fair share of volatility this year, as the group of stocks has seen an average volatility that has been more than 25% higher than the broader market indices.
Despite the volatility, chip companies have been able to slightly outpace the S&P 500 on performance, but there’s more to the group than appears on the surface.
Our research has picked up on a wider divergence of performance within the Semiconductor companies. To put it into technical terms, correlation among these companies has been dropping. When this happens in a sector, it means it’s time to make sure that you’re buying the winners and dropping the losers.
Recently, we’ve seen Wall Street firms issue price upgrades on two of the semiconductor stocks. Typically, an upgrade is great and indicates that it’s time to pick up the upgraded stock, in this case though, our model is suggesting that its time to sell on and buy the other.
As we mentioned, Micron Technology and Nvidia Corp both got price upgrades, but these stocks offer different types of products … and different indicators. Which one should you buy?
Micron Technologies, Inc. (MU)
MU is a semiconductor companies that focuses on memory chips for a number of industries, including computers, phones, tablets and other devices. The firm’s year-over-year revenue results have been consistently diminishing, as have the bottom line earnings per share results.
Put simply, Micron Technology has been struggling fundamentally.
The fundamental struggles have affected the stock, as MU shares have dropped 50% over the last twelve months and are down 13% year-to-date. To say that the stock has been struggling would be an understatement.
The charts show not only the poor performance, but also a technical resistance level that investors should be concerned with. A recent rally had taken Micron shares to just below their 200-day moving average at $13.50. In the past, this has been resistance, as the technical sellers have engaged in profit-taking.
Oddly, despite the poor price performance, 55% of the Wall Street analysts are still recommending MU as a buy and short interest remains low. In other words, sentiment is relatively optimistic on this stock as it slides down the “slope of hope.” Due to this, our models rate Micron as a sell with a target of $11.
Nvidia Corporation (NVDA)
Like Micron, Nvidia operates in the semiconductor sector. Their focus is on the technology dealing with video displays for everything from your phones to computers. The company is also expanding to become a player in the growing online streaming entertainment industry.
Business has been good for Nvidia’s fundamentals as year-over-year revenues are growing at an average of 9.6% and earnings-per-share results have beaten Wall Street analyst expectations in six of the last eight quarters.
Nvidia stock has been on a tear as a result of the positive fundamental picture, generating returns of more than 115% over the last 12 months and 40% year-to-date. Clearly this semiconductor stock is standing out as one of the Best in Breed companies within the sector.
Despite the blockbuster performance, Nvidia stock continues to see doubt and pessimism among its sentiment indicators. For example, analyst recommendation on this stellar performer shows 50% buys, and short interest remains near its two year highs.
In other words, there’s a “wall of worry” in place for Nvidia stock to continue climbing higher.
The charts show nothing but support for this stock, as it remains in a bull market trend and continues to trade above short- and intermediate-term trendlines which will offer support on any pullback.
In other words, this is the type of chart that traders are looking to buy into on a pullback. Our models rank the stock a buy with a target of $55.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.