Last month, we saw the biggest boom in tech stocks in two decades…
It’s all in this chart…
It’s of the “spread” – or gap – between the return on the S&P 500 Information Technology sector and the broad S&P 500 every month going back to 1990.
A positive spread means tech sector is outperforming the broad market. A negative spread means it’s underperforming.
As you can see, in May, the tech sector outperformed the S&P 500 by 10 percentage points.
That’s the first time tech has done so well relative to the rest of the stock market since 2002.
This outperformance is largely down to the GPT boom…
Since the launch of the artificial intelligence (“AI”) chatbot, ChatGPT, six months ago, it’s been creating a huge buzz on Wall Street.
Take chipmaker Nvidia (NVDA).
It’s the main supplier of advanced semiconductors for ChatGPT and other AI systems. Since the start of the year, its shares are up 167%.
That’s more than 10x the average yearly gain for the tech-heavy Nasdaq index over the past 15 years.
So should you pile into the AI boom and buy shares in NVDIA? Or is it a bear trap waiting to snap shut on unsuspecting investors?
These are the questions on the table today.
Plus, I’ll share with you an insight from colleague and former hedge fund managers Teeka Tiwari on how to manage your risk with this and other more speculative investments.
First, a warm welcome to new readers…
If you’re finding us in your inbox for the first time, congratulations.
It means you recently subscribed to one of the more than 20 investing advisories we put out at Legacy Research.
It’s the publisher of Teeka Tiwari, Nomi Prins, Jeff Brown, and Phil Anderson. We also work closely with traders Jeff Clark, Larry Benedict, Imre Gams, and Mason Sexton.
My mission as editor of the Cut is to bring you their top moneymaking ideas, straight to your inbox, every weekday.
And I highlighted the opportunity in Nvidia… and the AI megatrend… in these pages before it became headline news.
We don’t get every big call right…
But we were ahead of the curve on AI. And had you followed our advice, you’d have been ahead of most investors.
This from my November 14, 2019, dispatch…
[NVIDIA’s chips] are critical components of some of the biggest trends in tech.
Take artificial intelligence. As we’ve been showing you here at the Cut, it’s going to change the world in ways we’re only starting to fathom.
For instance, AI pilots will drive self-driving cars and drones.
AIs will also help us figure out unsolved problems, such as how to create nuclear fusion… or how to cope with changes in the Earth’s climate.
AIs will help us feed the world’s growing population. From detecting pests on crops… to figuring out what crops will deliver the best yields… to predicting the exact moments of ripeness for fruits and vegetables… AI will change farming for good.
AIs will even help improve schooling. For instance, they’ll be able to do the tedious task of grading, freeing up human teachers to spend more time with students.
Since then, Nvidia is up triple digits. But here at the Cut we remain bullish on the transformative power of AI.
In fact, after seeing what ChatGPT can do… and how quickly it has grown… we’re more bullish today than we were three years ago. This is a trend you’ll be hearing about a lot in these pages.
That doesn’t mean Nvidia is a good buy at today’s prices…
One thing that’s critical to grasp… especially if you’re new to investing… is that price matters.
Or as legendary value investor Howard Marks puts it, “There’s no such thing as a good or bad idea regardless of price.”
And right now, Nvidia is pricey.
Its shares trade at 55 times forward earnings. That’s more than 60% higher than what you’d pay to own shares in other chipmakers.
And Nvidia is valued at 37 times sales. That’s more than double its long-term average of 17 times sales.
And it’s more than four times more expensive than its competitors AMD, Intel, and TSMC. On average, they trade for just eight times sales.
That doesn’t mean Nvidia is destined to crash. What it does mean is there’s plenty of downside from here. So, you need to carefully manage your risk.
Teeka has shown the way at our Palm Beach Letter advisory.
It’s where helps subscribers how to build comfortable nest eggs for retirement. And his January 2020 recommendation of Nvidia is a case in point.
Nvidia is up 580% since Teeka recommended it…
That compares with a 28% gain for the S&P 500 over the same time.
And Teeka has carefully managed the risk by recommending his readers take profits along the way.
In December 2021, he told them to sell half their stake for a 435% gain.
On May 24 this year, he sent out an alert to sell half their remaining position for a 408% gain.
Nvidia is a now “free ride” for Palm Beach Letter readers…
That’s when you take back your original stake and let the rest of your position ride for free.
Say you buy a stock for $100, and it goes to $200. To turn it into a free ride you’d sell half your position and pocket $100 in cash.
This covers your original stake. You’ve no longer any of your money at risk. And you now have a risk-free ride.
Kudos if you followed Teeka’s guidance…
You’ve made a four-times return over three years, while closely managing your risk.
Now you’re riding for free as the AI boom plays out.
And if you didn’t act on Teeka’s recommendation, don’t worry. He’s going live next Wednesday with a new opportunity. (RSVP for that here.)
It’s got to do with a new development he says will drive crypto user growth to 5 billion by 2030. And Teeka believes it could trigger the last great crypto rally before the technology matures.
Just remember your risk management. A good rule of thumb is to take a free ride when an investment doubles in price.
That way, you’re still in with a chance to profit. But you can sleep well at night knowing none of your hard-earned cash is at risk.
Regards,
Chris Lowe
Editor, The Daily Cut