They say that markets tend to climb the wall of worries. This is very true these days since we have the NASDAQ Invesco QQQ Trust (QQQ) up 24% year-to-date even in the face of tremendous headline risks from many angles. More specifically, look at the chip sector where a stock like Advanced Micro Devices (NASDAQ:AMD) is up 70% in 2019 despite the ongoing trade war.
This is a slap in the face to all fearmongers scaring investors out of owning great stocks just because the U.S. and China are negotiating a trade deal in a less than ideal setting.
These headlines wreak havoc in AMD and the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) as a whole. While the stock prices go for a ride, their fundamentals remain intact. In fact the demand for AMD products and services has a runway at least a decade long. And as long as they have strong management like they have with current CEO Lisa Su, then there is no reason to sell the stock over short-term fears.
Sure, a tweet here or a media headline there could get the traders’ attentions, but it’s not a reason alone to change the investment thesis for the stock. There is no evidence yet that the US and China won’t eventually come to terms. So the prospects for AMD stock remain bullish.
AMD Stock Is Still the Top Chip Stock
If I own AMD already, then I’m staying long. Otherwise, I treat the dips as opportunities to buy AMD stock for the long term. It has performed most consistently in the sector even last year when markets were correcting hard.
Fundamentally, it’s not cheap but that doesn’t matter. AMD is still a growth company, so when I evaluate those types I don’t look for profitability. Instead, I need them to grow a lot. And in order to do that they need to spend a lot. Moreover, AMD stock sells at only 5 times sales. So while the price-to-earnings ratio is scary to some, the stock is not bloated given its growth trajectory.
In addition, technically AMD stock is still in the hands of the bulls. The weekly chart shows a clear ascending channel. And as long as the lower edges continue to hold, then the AMD bears will have a hard time taking control of the price action.
Short term there are important levels to note. For the last few weeks, AMD stock price range is between $27.50 and $34 per share. The breach of either sides will carry momentum in that direction. Also, since the beginning of August, AMD has been setting higher-lows attacking a neckline at $32 per share. If the bulls can break above it then they could rally another $3 from there. And that would launch the opportunity of the next leg higher.
If the general equity markets cooperate, that would fuel the AMD buy programs to exceed $35 per share. But conversely, if the bears are able to bring AMD stock below $29 per share, then they may have the opportunity to trigger a $3 bearish pattern. So clearly the next few weeks are important to recommit to the direction of the next wave in Advanced Micro Devices stock price.
The Bottom Line for AMD
Of all the chip stocks, AMD is the only one I would bet on these days. It has had the fewest fake-outs. Both stocks of Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC) have disappointed investors several times in recent months. So I consider AMD stock as the best bet on the upside potential of all chip stocks if not the market as a whole.
If stocks are higher in the future, then AMD is definitely higher. To that, the bearish consensus is starting to build. The media is pushing the notion that we are in the late stages of the economic expansion. Meaning that a recession is coming. While that is eventually true, there is no evidence yet that a recession is imminent.
I just find it hard to believe that we could have the economies shrink when everyone is employed and rates are so low. Admittedly, these are unprecedented times so there are no real experts on what comes next. Therefore I stick with my bullish thesis for as long as the data continues to be in line with expectations as it has been.
Companies like AMD are still delivering excellent profit and loss statements with good balance sheets. And the consumer in the US is still spending with extreme vigor, because everyone that wants a job has one. Just like it’s not a good idea to buy a stock in anticipation of something without confirmation, it is a mistake to anticipate a rescission without confirmation of its impending arrival.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
