Advanced Micro Devices (NASDAQ:AMD) stock is a fan favorite for investors and traders alike, and for good reason. It’s been delivering results on Main Street and Wall Street. In the past two years AMD stocks is up 285%, which is almost seven times more that the S&P 500.
Clearly AMD is doing something right because price is truth. But Nvidia (NASDAQ:NVDA) gets way more kudos than AMD. This is a catch-up opportunity for this year.
For as long as the company continues to execute this well, it’s one to own for the long term. This doesn’t mean that it is a perpetual blind buy. This is a momentum stock so it moves fast in both directions. Timing new entries or adding to positions is tricky. While I don’t seek to find perfect openings, I prefer to avoid the obvious mistakes. For that reason alone I would caution buying AMD stock at these levels. Hold back from throwing the tomatoes at me yet…
If you’ve read my prior notes, over the years I’ve been more bullish than not on AMD. In my last two articles I raised caution and corrections followed. I warned again when I suggested to “buy the dip into support” in my note on Jan. 11. From the day’s high, the stock corrected 15% and that was the opportunity to get in. AMD stock held support at $85, which was exactly where I had placed my marker for the readers then.
Now we face the same dilemma, which is that it’s going into resistance. Onus is back on the bulls to break through it. If they do that then they can target 3-digit prices. I’d rather see that happen and chase then buy the shares now in anticipation.
Fundamentally AMD Stock Now Has Value
When debating with investors almost always the other side considers NVDA the better company of the two. I get pushback when I point out that AMD stock is up 4,900% versus NVDA 2,225% in five years. They say because it sucked badly before. Even if that’s true, investing is finding value where others don’t yet. This is the case now and more on this a bit later.
Most experts give its CEO Lisa Su most of the credit for the turnaround. She earned a ton of kudos and they have the benefit of the doubt. Yet, AMD is now clearly much cheaper than NVDA. It used to be that it had the higher price-to-earnings but now it’s half as much expensive as NVDA’s 96. Add to it that the price-to-sales is also twice cheaper for AMD then it’s the one I prefer between the two.
Intel (NASDAQ:INTC) is the third competitor and it’s the cheapest but for many reasons. It’s been lagging because management has failed to impress us on any front. This could be their year but the proof is in the pudding. Until then it’s a two-horse race for chip stocks and my pick at this point would be AMD.
The Elephant in the Room
Overall I would rather wait until the indices correct a bit. Wall Street has gone too far given the grim economic picture. Main Street is still in shambles but stocks have never been higher. Governments are panicking and investors should heed their warnings.
In the U.S., the White House is rushing to deliver a $1.9 trillion stimulus package. This is on top of the $1.4 trillion per year that the Federal Reserve already pumps ($120 billion per month). New Treasury Secretary Janet Yellen is calling for big action now. These seasoned economists wouldn’t do that if things were well. They are all calling for immediate intervention. To stay safe I must assume that they see something that we don’t. Exercising caution is the minimum that responsible investors could do.
I am not calling for an outright short of the indices. It is crazy to fight this extremely bullish price action. I should be waiting before adding to long-term positions. This is not an obvious point of entry for anything. It is OK to nibble long on bad days, but going all in is reckless.
Rejecting the Misconceptions
If an investor is absolutely itching to get long they should consider using options. In specific cases they can be safer than buying shares. Consider the scenario where investor A spends $9,100 to buy 100 shares of AMD stock today. Investor B opts to sell the April $77.50 AMD put instead and collect $200 in credits. Then let’s say we get a correction and AMD stock falls to $76 per share. Investor A would already be down $1,400 or 15%, while investor B could still green. If investor B is assigned shares at $77.50 the break even is $75.50.
The caveat is that I never sell puts in stocks I do not want to own. That’s how I avoid disaster scenarios. AMD moves fast and what looks like solid floors could disappear in an instant. I remember last March while prices were collapsing I sold AMD $20 puts for more than $2 per contract. In retrospect it was a slam dunk winning trade. But in the heat of the moment I assure you my adrenaline was pumping. The difference is that I was taking advantage of others’ panic.
Homework gives me confidence of knowing where there is value. When I see the opportunity I pounce. Here I see no rush to chase so I am totally fine waiting it out. There will be plenty of time for more upside. The whole sector will have a tailwind for years.
The pandemic put a rush job on the digital revolution. The demand for AMD, Nvidia and Intel’s products will be strong for many more years to come. There is enough room for all of them to prosper. Knowing when not to chase is going to make the difference between profits and losses.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.