To everyone who has followed me, one of the areas that I prefer investing in, is companies that are over sold and over shorted. Short covering can be a great shorter term profit driver. In this respect, I intend to share my analysis of Nvidia (NVDA) and AMD (AMD) as they both operate in the Discrete GPU market for a sizable junk of their revenue and are near longer term lows. Before analyzing these two stocks from a trading perspective I would like to discuss some facts regarding bottom picking.
Knowing when to take profits on the rebound is crucial for successful adoption of this type of “bottom feeding” contrarian strategy. The markets always over buy and over sell on good and bad news, and you can profit from this irrational behavior of human psychology. For these two names there are two immediate catalysts investors and traders must look out for: Temash and Kabini which are now being made by TMSC (AMD seems to have paid off GF for good reason); and Tegra 4 for Nvidia. By the way Nokia and then AMD has been our greatest trades in technology in 2012; our other great bottom picking trade was Heritage Oil which traded in London at 1.19GBP in June 2012(HOIL.L). We bought Nokia at $2.60s and AMD at $1.83 and $2.10 after liquidating an earlier position. We have yet to buy Nvidia but we have kept it on our watch list. Let us now look at the technical perspective for these two names over the next few months.
First, as we predicted, Nvidia has actually now had a minor channel breakdown (see the link for channel diagram). That is correct, the stock is trading outside of the rising channel which first started in November. Elliot wave theorists would point to a longer term b wave, however I do not subscribe to a rigid 5 wave view thus I look at primarily the chart pattern itself. Nvidia is no longer on a upward sloping channel but a sideways one. A fact that may have gone unnoticed as it has not yet seen a major breakdown. Meanwhile, AMD’s short covering rally, may have come to a premature stop due to the fear caused by Intel’s inventory overhang. Intel, now has a larger stock of unsold inventory than it has had for a few years. Let us look at the charts.
Starting with Nvidia, we can see the share price has broken below the channel and is meeting resistance at the 11.90 to 12.30 range. The market has fear of the death of the GPU, much like what happened to 3Dfx which once provided dedicated 3D accelerators. This could impact both Nvidia and AMD over the longer term.
Meanwhile, the AMD chart pattern indicates a potential breakdown but it has not yet materialized. AMD, due to the higher beta and higher debt has a large potential drop, all the way back to $2.15. A note of caution though, the AMD pattern has not yet materialized and is unlikely to fully develop because of the large number of shorts willing to close their positions. Today, the short percentage is around 18.2% of floating shares(source). When we starting recommended buying AMD short coverage was around 29%. In all likelihood the short interest will come down, to about at least 10-12%, before the release of Temash. So there is around 2 days of volume left just for short covering. This will provide some support before its reaches the lower $2.15. However, it may be prudent to take profits if you bought at the $2.30 level. Longer term it is still fundamentally on track to breach $3 on the first signal that the company is again free cash flow positive. AMD is not Intel, thus it is valued at a much lower price to sales ratio, as the market is looking for signs of reduced bankruptcy risk, rather than growth and capex caps.
In light of these two technical patterns and Intel’s evolving GPU’s the risk reward for these stocks in the next month is again only for the brave. We rate both Nvidia and AMD a hold with reduction in exposure as a short term optimization strategy. AMD is different at the moment as it has not technically broken down the upwards channel but in all likelihood it will, similar to Nvidia. Nvidia has already broken its upward channel and converted into a sideways movement. We recommend reducing exposure until some weeks before the next catalyst hits which could be in March-April (Tegra 4 SoC for Nvidia and Temash SoC for AMD).
Disclaimer: Unless stated otherwise these views are not the opinion of any of my present or past employers. In addition we take no responsibility for your gains or losses if you follow our advice. Please speak to a financial advisor if you are unaware of the risks inherent in algorithmically traded markets.