I’ll be the first to say, I don’t know when the stock market will bottom or at what price. However, there are positives to selloffs, the main one being that we can buy excellent companies for excellent prices. Nvidia (NASDAQ:NVDA) is one of those stocks, with shares down significantly from the recent high.
Twice this week, NVDA stock dropped below $200 a share. If you’re going to invest in stocks — even if that’s just the SPDR S&P 500 ETF (NYSEARCA:SPY) — then you’ll have to live with pullbacks.
That’s just the way it is. But they don’t have to be scary and feared like they’re made to be.
Embracing the Decline
When markets start to roll over, investors have to brace for losses — and we don’t know if it will be a 5% drop or 30% drop. Investors need to have some cash on hand for this very simple strategy, but all it requires is setting some downside good-til-cancelled (GTC) limit orders. The orders will linger at investors’ set price until they expire or are filled.
Investors can change their mind or adjust these orders if they so choose, but it does one very important thing. It changes the mindset from fear of the selloff to embracing the decline. Instead of fearing the losses, investors may find themselves rooting for more downside in order to get some of those “fantasy” fills.
Here’s the caveat. Because long-term investors know that markets eventually rebound, this is a sound yet simple strategy if done in a non-aggressive manner. However, the orders must be for high-quality companies; otherwise, we could be paying too much for lousy businesses.
Is Nvidia a high-quality company?
Valuing Nvidia
This company has so many long-term catalysts in play, it’s ridiculous. That includes gaming (which has several catalysts on its own), the cloud, A.I. and machine learning, graphics and data centers. All of these concepts are different investment themes with solid growth.
Nvidia gets a bad rep for two things. The first was the stock’s explosive run higher, rallying from $20 in January 2015 to 12-times that figure in January 2018. The second came from the crypto-related bust in late 2018.
I don’t think it’s fair that investors hold NVDA stock’s ramp against it. It feels like bitter investors taking the easy way out, by arguing that the stock is overvalued without doing anything more than looking at a multi-year chart.
The second point is much more well-deserved. Crypto-miners were buying up Nvidia’s GPUs, even if they weren’t crypto-specific GPUs. Management either intentionally misled investors about what was fueling this growth or didn’t realize who its end buyers were. For what it’s worth, I think it’s the latter, but it’s not a good look either way — and NVDA stock paid dearly. The same can be said for Advanced Micro Devices (NASDAQ:AMD).
Analysts now expect earnings of $7.83 per share this year, leaving shares valued at a reasonable 25 times this year’s earnings.
The company’s recent earnings report topped expectations, as did management’s outlook. This is where things get a bit hairy. Nvidia’s outlook accounted for a $100 million revenue hit due to the coronavirus outbreak. Since no one in the world seemed to see this type of outbreak coming though, it’s not clear if management’s guidance will prove accurate.
Even in that event, I’m willing to argue that the stock’s 39.5% peak-to-trough decline more than accounts for most potential shortfalls.
Trading NVDA Stock
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Like I said in the intro, I don’t know when or at what price the market will have bottomed. What I do know is that the market topped on Feb. 19, one day before Nvidia shares hit a high of $316.22. Down more than $120 from that point, the selling seems overdone in my view. Or at least warrants a closer look by the bulls.
As a result of the decline, one of my “fantasy” orders at $200 was filled. That does not mean that NVDA stock will not go lower, but it does mean that, as a long-term holder, I got what I believe is a great price in a great company.
On the daily chart above, you can see that Nvidia did a great job holding the $190 mark and reclaiming the 200-day moving average. On the weekly chart below, look at the moving average support shares have nearby.
Should $200 fail as support and NVDA stock falls below $190, look for the 200-week moving average and uptrend support (blue line) to buoy it. Below puts the $140 to $150 range in play.
On the upside, let’s see if Nvidia can reclaim the $230 to $235 area, putting $250 back on the table.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he was long NVDA.
