How and Why I’m Buying Nvidia
We don't know everything about where Nvidia is going, but here's what I can deduce based on experience for a trade.
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There was some aggressive selling at the open on Thursday morning, with about 70% of stocks in the red and more new 12-month lows than highs. There is some reflexive bounce action, but the selling pressure is the most severe that we have seen in a while.
What is most interesting about this type of selling is that it doesn’t tend to be stock-specific. Stocks aren’t being dumped because of poor earnings or bad news. They are being sold because they are part of an index or sector that is viewed as technically extended or fundamentally expensive. All stocks in the group or sector are sold without regard to their individual merits, as exchange-traded funds and indexes are the primary vehicles for selling. Every stock in the ETF you are selling is sold.
The good news is that this indiscriminate selling creates opportunities for astute investors. The goal is to identify those that remain fundamentally sound and offer good value.
The challenge is that if this action turns into a deeper correction, then even the "good" stocks will be taken down even further. Fundamentals won’t provide support when the indexes are sold.
The best course of action is to use an incremental approach and slowly add to a position that is under pressure if you feel the fundamentals and valuation are solid. That is the approach that I’m taking with Nvidia (NVDA) .
My view is that Nvidia is simply undergoing a technical situation and still has a very solid valuation. This morning, Barclays raised its price target to $240, which is substantial upside from the current price of $175. There are about 40 analysts covering Nvidia, and the average target price is $212, which is 20% higher than the current price.
My thesis is that this is not a significant top in Nvidia. It is just some normal volatility and cyclical action. I don’t know how low Nvidia will go during this corrective action, so I’m making numerous small buys over the course of days or weeks. I am quite confident that if I average in slowly over time, then my cost basis will reward me when the inevitable recovery takes place. I suspect that expectations for third-quarter earnings will be a positive catalyst.
It is important to note that I’m trading Nvidia rather than investing in it. It may also be a great long-term investment, but that isn’t my current concern.
This isn’t as exciting as trading a fast-moving biotechnology like uniQure (QURE) , but it has the potential to produce a solid gain if it is timed right.
There are numerous other stocks that offer similar strategic opportunities. The important thing is to know what you are buying and to make sure you don’t build positions too big or too fast.
At the time of publication, DePorre was long NVDA and QURE.
