Magnificent Seven Weakness Creates Rare Opportunity to Buy Superstar Stock
This is how and why I’m trading this mega-cap technology name.
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On Tuesday, Nvidia NVDA did something unusual for a mega-cap stock. At the open, it hit a new all-time high and then it closed right at its 50-day simple moving average. That was an intraday drop of about 8%, an impressive level of volatility for the stock with the second-largest market cap after Apple AAPL.
Some market pros view Nvidia's quick failure at its all-time high as a technical negative that suggests a top may be forming. While that is possible, it is unlikely, and Nvidia will likely see new highs before it reports fourth-quarter earnings.
When trading mega-cap names such as Nvidia, Apple, Meta META, etc., it is important to understand that they trade on psychology more than anything else. Fundamentals and technical patterns are important, but what really moves these stocks is the emotions that surround them.
For much of 2024, the Magnificent Seven stocks were market leaders. That had something to do with optimism about AI, but the main reason that these stocks stayed strong was the perception that they were a safe haven. Since they consistently exhibited relative strength versus the rest of the market, they were viewed as a secure place to invest capital, even though valuations might be aggressive.
Some of the Mag 7 names are starting to lose their safe haven appeal, however. Microsoft MSFT and Apple have been lagging behind, and there are more questions about their valuation. On the other hand, Nvidia still has an attractive valuation and is likely to continue to appeal to safe-haven buyers.
Nvidia is expected to grow EPS by 50% in the the fiscal year ending January 2026 versus a P/E ratio of 57. Apple, on the other hand, is looking at EPS growth of about 10% in the year ahead versus a P/E of 36. There are analysts who believe that estimates will increase, but they need to make a leap before Apple can be considered a good value.
Some analysts justify the difference in valuation between Apple and Nvidia based on the fact that semiconductor stocks like Nvidia are notoriously cyclical, but there are no signs that the cycle is starting to turn. On the contrary, Nvidia is introducing new products that will extend the growth cycle for Nvidia for years to come.
Don’t let the volatility in Nvidia scare you. It has nothing to do with the health of the company. Nvidia is a major piece of all the index ETFs, so when the market sells off like it did on Tuesday, then Nvidia sells off also. When you sell the QQQ ETF, you also sell a big chunk of Nvidia. The biggest risk of holding Nvidia is overall market conditions.
Nvidia is expected to report its fourth-quarter earnings on February 26. As we approach that date, I anticipate that expectations for a big beat will start to build, and that is the move that I want to capture. To do that, I’m going to be buying Nvidia on weakness with the intention of selling some shares if it starts to run back up in front of its earnings report.
My second favorite Mag 7 MAGS name is Meta, and I will discuss it in a future column.
At the time of publication, Rev Shark was long NVDA and META.
