After you receive this alert, we will make the following trades:
–Sell the remaining 310 shares of Nvidia (NVDA) at or near $144. This will close out the portfolio’s NVDA position, which returned more than 170% since it was added to the portfolio in June 2019
–Buy 370 shares of the First Trust Nasdaq Cybersecurity ETF (CIBR) at or near $42.40. Following the trade, the portfolio will own 2,590 CIBR shares, roughly 3.15% of the portfolio
–Buy 90 shares of PepsiCo (PEP) at or near $170.50. Following the trade, the portfolio will own 650 PEP shares, roughly 3.17% of the portfolio
–Buy 95 shares of Vulcan Materials (VMC) at or near $164.50. Following the trade, the portfolio will own 305 VMC shares, roughly 1.4% of the portfolio
Unexpected news that the U.S. government has imposed a new license requirement on Nvidia for any future exports to China and Russia for certain products has raised uncertainty not only for roughly $400 million, or about 7%, in Nvidia sales for the current quarter but also revenue in future quarters as well. Consequently, we are exiting NVDA shares here on Thursday morning. Nvidia noted the new license requirement may impact the company’s ability to complete its development of H100 in a timely manner or support existing customers of A100 and may require the company to transition certain operations out of China.
In our view, this latest development in addition to the continued weakening in the gaming market and risks of a slowdown in enterprise spending that could slow data center chip demand skews the risk-to-reward profile for NVDA shares to the risk side. Similar to why we trimmed the portfolio’s position in NVDA shares given concerns ahead of its July quarter earnings report, here too we would prefer to be prudent investors, locking in profits rather than stick around to watch them evaporate further in an uncertain market.
Technically, the NVDA chart shows lower highs and lower lows with a slew of distribution over the past few months. With seasonal trends bearish and a strong distaste by investors for anything semiconductor related, there are lower targets for NVDA ahead. Moving average convergence divergence (MACD) is on a sell signal and money flow has nosedived this past month into negative territory. The $125 area could be a good area of support, but there is not much in the way of price help below that area until $105 or so. We do not want to be part of that situation. On the flip side, if NVDA can manage a rally and rise above $195 (heavy lifting), that would indicate the bulls are in control and we would consider a move back in.
As we make this move with NVDA shares and add them to the Bullpen for future consideration, we will also downgrade the shares of Advanced Micro Devices (AMD) to a Two rating from One given the risk of similar headwinds, if only from an optics perspective. AMD has already shared that U.S. officials have asked it to stop shipping artificial intelligence chips to China and the new license requirement will prevent shipments of its MI250 chips to China, but AMD believes its MI100 chips are not affected by the new requirement. That has led AMD to conclude it doesn’t expect to see any material impact from new license requirements. However, given the current market mood, AMD shares are likely to face a “shoot first, ask questions later” environment and that is leading us to step to the sidelines with AMD shares.
In light of the Biden administration’s new efforts to crack down on China and given our position in Applied Materials (AMAT) , we will be on watch to see if it extends that new licensing requirement for semiconductor capital equipment as well.
We are deploying the returned capital associated with the NVDA trade into the shares of First Trust Nasdaq Cybersecurity ETF, PepsiCo and Vulcan Materials to build the portfolio’s exposure to cybersecurity as well as infrastructure spending while bulking up on the beverage and snack business at PepsiCo. The moves with CIBR and VMC are in keeping with our strategy to use pullbacks to grow position sizes at favorable prices, while adding to PEP also increases the portfolio’s dividend stream that much more.