Nvidia Struggles Suggest Market Is in for a Down Year
Covered call strategies should work well in 2025, with this value stock emerging as a prudent pick.
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The first week of the new U.S. presidential administration got off to a nice start, as far as investors were concerned.
The Dow added 2.2% last week while the NASDAQ and S&P 500 both climbed 1.7%. With the slight across-the-board pullback on Friday, all three indexes are just below all-time highs. The S&P 500 posted better than 20% returns in both 2023 and 2024, something that hasn’t happened since the late 1990s. Unfortunately, earnings did not nearly keep up with this rise and most of the gains in the indexes were the result of multiple expansion. In addition, most of the earnings growth and gains in the indexes came from a small set of mega-cap names like Microsoft MSFT and Alphabet, Inc. GOOGL.
As we begin trading in 2025, valuation metrics are beyond stretched using traditional valuation metrics like price-to-sales ratio or Robert Shiller’s CAPE Index. In my opinion, a lot of potential gains in the market in 2025 were borrowed forward last year. In addition, when the market is trading at such extreme valuation measures, it is very vulnerable if any one of the core narratives supporting equities get dinged.
Look at what is happening to NVIDIA Corp. NVDA and every AI-related stock in trading on Monday as an example. All because a startup in China may have come up with a way to developed AI much cheaper and faster.
I would not be surprised at all if markets were flattish or even down this year as the market consolidates its gains over the past two years. Covered-call strategies will work quite well in this investment environment. Straight equity investing relies on share gains to power performance. An investor utilizing covered-call positions just needs the underlying to stock to trade flat or even slightly down over the option duration to make a profit.
This alters the investment equation and calculation. It also makes investing in value stocks, which have vastly underperformed growth names in recent years, much more palatable.
I like Ford F for an example of a value stock that can be "enhanced" by a simple covered-call strategy. The shares already trade at under six-times earnings, and outside of a recession, it is hard to see much downside at these trading levels. The stock should have a decent floor already, given its dividend yield is nearly 8%.
Options are extremely liquid against the equity, meaning covered-call orders will execute quickly. Adding the option premium to the stock’s already large dividend payout enhances the yield and provides some additional downside protection. It may not be the sexiest trade but a prudent one in an overbought market.
At the time of publication, Jensen was long F.
