Equity prices are hotter than ever, literally. The indices continue to break records with help from huge stimulus packages. Yesterday was a down day but a rare one of late. Nvidia (NASDAQ:NVDA) stock is down 8% from its highs, but that was a record level. Contrary to popular belief on Reddit, stocks can actually travel in two directions.
This week is extra eventful because we are in the throes of a massive earnings stretch. The giga-cap tech sector is reporting blockbusters numbers judging by Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG).
The scorecards justify higher valuations but not necessarily the price action.
A Better Starting Point
This brings me to my point today that NVDA will allow us lower entries this year. This is not an insult because I’ve been a fan of it for a long time. I would simply prefer it from a better starting point.
My goal is not to find a perfect price into stocks. I just want to avoid easy mistakes when I can help it. The long-term investors baulk at this notion. Their argument is that over the long term it won’t matter. If that’s the case, the logic goes the other way around, too. If it’s OK to tolerate a few red ticks, then it’s also fine to miss out on green ticks.
Either way, the first step is the same, which is to agree that the company is worthy. The bullish case for NVIDIA is a no-brainer. They are the leader in the sector and setting trends. They deserve a premium for that but not as much as now.
I say this specifically relative to Advanced Micro Devices (NASDAQ:AMD). Nvidia’s growth rate is impressive. Since 2018, they grew revenues and net income by almost 70%. Arguably this justifies the 91 price-to-earnings (P/E) and 25 price-to-sales (P/S).
I would be OK with that if it weren’t for the AMD stats. It doubled its revenues and grew net income 10 times in the same period of time. AMD’s valuation is therefore dirt cheap with a 39 P/E and a P/S under 10.
Reasons for Caution with NVDA Stock
If we compare these two outstanding stars in the same sector, one has gone too far. When I saw opportunity in the past I came out quickly in support of NVDA stock. In fact, out of the last three write ups, two were bullish.
My contention is that they will both offer better entry opportunities this year.
Markets are at all-time highs and there is so much in flux. Consequently, I prefer not to deploy new investment risk in size. I can still participate in breakout opportunities with fast hands. However, investing for the long term from here comes with extraordinary risk.
Why Investors Are Vulnerable
We haven’t had sustained equity selling in an extremely long time. This leaves us vulnerable to sharp unpredictable corrections. A mere reversion to the mean in the S&P 500 weekly chart would amount to a 10% correction. Even if we fall 20%, the bulls would remain in charge of an ascending channel. Everything is going the bulls’ way, so the setup can only get worse from here.
Today the Federal Reserve will tell us more about their timeline for the tapering process. Their next move will absolutely be bearish for stocks. The White House is almost finished with its stimuli as well. Wall Street is going into a marked decrease in tail winds. This leaves NVDA stock vulnerable with the collective. Since it rallied so hard it has a lot of downside potential that could unfold.
It is important to make the distinction between actively shorting and simply being cautious. I would not consider shorting NVDA a smart move. On the other hand, I am willing to miss out on a few upside bucks if it rallies without me. Extreme love and hate are both wrong. Somewhere in the middle lies the truth.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.