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☕ Nvidia's earnings are more important than the Fed

May 20, 2024

Good morning! 👋

The markets were flat when I took to the air with the venerable Stuart Varney this morning but have since powered up. (Watch)

There's only one thing on my mind this week.

Nvidia.

The news front will be quiet, which sets up what could be a whopper of a move if everybody's attention gets focused like I think it will (and social media being what it is).

Here’s my playbook.

1 – Nvidia's earnings are more important than the Fed

Here’s why:

Sales may be up 200% or more
Earnings could rise 400% or more

We are now very close to the $1,000 per share target I set last year when people thought I was bananas for saying so and first in the water at that level.

To be fair, we haven’t seen the split I also called out as a possibility, but I continue to think that’s in the works.

Wall Street is increasingly on board with the narrative I created, and a number of analysts are now putting up targets $1,000+. Imitation, flattery and all that jazz.

Now it’s time for a new one... I think NVDA could double again from here within the next few years.

Assuming the stock trades 30-35X forward earnings and EPX is right around $60 a share by the turn of the decade, that’s roughly $2,000 a share if I’ve done my back of the envelope math right.

Honestly, I think there’s a good case to be made that’s conservative as challenging as that may be to wrap your mind around.

I believe that management will a) split the stock which will bring more money running at lower prices and b) produce even better, faster, higher revenue and profit growth.

Nvidia stock has returned 206.54% over the past 12 months versus the SPY which has served up an incredible 29.35% according to Koyfin.

Technically speaking, the gamesmanship will be high particularly as we head into earnings. I am not sure if big traders will run prices up ahead of time, then orchestrate a post-earnings rug pull or create one ahead of earnings that scares the weak money out only to run the stock up afterward.

Then again, I don’t care much either.

Both scenarios are an opportunity in the scheme of things. (Read)

Keith’s Investing Tip: People argue with me constantly about a few percent here and there but that’s moot. A $500 investment in NVDA on May 20, 2014 would be worth more than $108,653.10 today according to finmasters. There are 10-15 Nvidia’s out there right now.

I hope I am smart enough to own enough.

2 – Buffett's been selling stocks for 6 quarters in a row

I saw a report over the weekend that Buffett’s Berkshire Hathaway has been selling stocks for 6 quarters in a row.

The temptation is to read into that.

Don’t.

When you’ve got as much money has he does, you can’t just up and sell something when it’s time to rebalance or pursue a new investment opportunity (which I can almost guarantee you he’s doing). You’ve got to gradually buy or sell over time to avoid moving markets counterproductively.

Berkshire’s trimmed Apple (and still owns $135B worth) along with Chevron (and still owns $305M). Meanwhile he’s also maintained BofA, Amex and Coke. (Read)

Unka Warren – and this is interesting - unceremoniously dumped $687M worth of HP – all 100% - while unloading most of Paramount Global claiming credit for making a bad decision to pick up shares in the first place.

I’m most interested in the fact that he also recently revealed that he’s been buying Chubb, an insurance company. Insurance, if memory serves, accounts for roughly 40% of Berkshire’s revenue last quarter so it is a return to its roots of sorts.

Chubb’s shares jumped last week when this hit the headlines, but I think prices could return to the $255-$260ish level.

Trade Idea: A LowBall Order could work nicely as would a bearish credit spread if that scenario comes to pass.

Keith’s Investing Tip: Many investors constantly hunt for stocks that are about to breakout and that worked great for decades. These days the game is different. Computerized trading now means the “tell” is a big move up on news, then prices that relax to “fill the gap” the news created which is what’s happened with Chubb now that the public knows Buffett’s buying.

3 – Fed notes Wednesday are moot

The smartest people in the room will fawn all over FOMC notes due Wednesday.

Let ‘em.

They’re worried about being “right” whereas the best, most successful investors focus on being profitable even if they’re wrong.

The question at hand is going to be whether the Fed is doing enough and any sign that Powell won’t, in fact, “stand pat” on rates.

Meanwhile, no sign of the “7 cuts in a year” crowd this time around.

4 – Can Palo Alto pull a hat trick?

It wasn’t all that long ago that Palo Alto Networks was a legendary Silicon Valley tech name.

Now, it’s more like... who?

Sales of its core firewall business have slowed and management seems more interested in buying growth than innovation. Guidance may be substantially less than even the worst estimates. (Read)

Billings may grow by just 3% this quarter. 🤦‍♂️

Let that sink in.

3%... for a tech company in today’s day and age??!!

Short, avoid. There are better choices.

5 – The shrimp did it

Red Lobster has declared Chapter 11 and blamed the chain's downfall on endless shrimp, a $20 all you can eat deal it saw as a loss leader intended to bring in new customers who would become regulars. And presumably eat something other than shrimp. (Read)

Restaurants are always one promotion away from cratering their margins, which is why investors need to think very, very carefully about holding shares. And, not for nothing, I don’t advocate you own ‘em except under very specific circumstances. Upgrade to paid

Just because something is popular, doesn’t mean it’s profitable.

MyPOV: Investment manager Peter Lynch is often quoted for popularizing the saying invest in “what you know” and people interpreted that as buy stocks in companies whose products you use frequently. What he really meant was do your homework and “know” the companies you are buying. Big difference.