Editor’s Note: This article was updated to correct the name of Advanced Micro Devices.
Shares of Advanced Micro Devices (NASDAQ:AMD) were up over 7.7% in late-day trading on Dec. 12. Investors were cheering an “agreement in principle” in the U.S.-China trade war. The hope is two-fold.
First, they hope the Trump administration will suspend the additional tariffs scheduled to go into effect on Dec. 15. Second, they hope this news would lead to the signing of the long-awaited Phase One deal between the two super powers.
Investors have every right to celebrate this news. After all, the trade war has held the market for over a year. Every new headline or tweet adds volatility to the market. And for good and bad, you can see this reflected in the stock price of Advanced Micro Devices.
But I would caution investors from trading this news too much. It appears that much of the good news is already baked into the company’s stock price.
Investors Trading the News
Trading the news is a common strategy that investors apply as a hedge against periods of market volatility. The bear market spawned by the dot-com collapse and then the Great Recession made even the most ardent buy and hold investors look for ways to protect their portfolios against market downturns. And there’s plenty of evidence that proves this has been exactly the case with Advanced Micro Devices.
For instance, on Tuesday, June 25, shares of Advanced Micro Devices were trading at $27.58. The next day, the United States and China agreed to a tentative truce in advance of continuing negotiations. The stock jumped up to $29.92.
The stock climbed even higher to $34.39 on Monday, July 15. The very next day, President Donald Trump threatened additional tariffs on $325 billion of Chinese goods, and Advanced Micro Devices stock fell to $33.85 on its way to a low of $27.99 on Monday, Aug. 5 in the wake of a so-so earnings report.
Here’s another example: On Oct. 10, Advanced Micro Devices was trading at a two-month low of $28.38. The next day, President Trump announced the “Phase One” deal and the stock shot up.
Why Does This Matter?
I know that many of you may say “so what?” Semiconductor stocks are notoriously volatile. I don’t disagree. But the thing is, as volatile as semiconductor stocks can be, they’re also fairly predictable. The stock price of most semiconductor stocks is based largely on the laws of supply and demand.
But shares in Advanced Micro Devices are up over 124% in 2019. And that can’t all be because of their new 64-core Ryzen Threadripper 3990x chip. It also can’t be explained completely by development issues at rival Intel (NASDAQ:INTC).
And that gets to the real concern about the company’s valuation. Right now investors are paying approximately 67 times earnings for the stock. That makes observers wonder how much growth the stock price can support. And if that doesn’t concern investors, consider that Advanced Micro Device’s stock price is almost exactly where it was before the dot-com bubble burst.
All of this suggests that the stock may have to fall despite the encouraging news. Can anyone say irrational exuberance?
Fade the News About the Trade War
“Those who fail to learn the lessons of history are doomed to repeat them.” This is a quote attributed to a number of people, but there is a takeaway for Advanced Micro Devices investors.
Trading the news can be an effective trading strategy for both day traders and long-term investors. However, when a stock is getting out over its skis, it may be time to pump the breaks. Right now, the trade war has decoupled Advanced Micro Devices from its fundamentals.
Is the stock likely to grow modestly in 2020? There’s plenty of evidence to suggest that it will. But it may not be the kind of growth that investors expect. It may be time to fade the news and let the fundamentals of the stock take over.
As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.