Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Tuesday, Aug. 27. The Bottom Line segment of today’s podcast starts at (2:14) and Stocks on the Contrarian Radar at (2:55) for listeners who want to skip ahead.
State of Play
Stocks were unchanged yesterday except for tech, which dropped a bit. As we look at our board of indicators for signs of direction at 0645, things continue to be quiet:
Stock index futures are unchanged with all major US indexes hogging the break-even point;
Commodities aren’t doing much either. WTI crude oil is down 0.7% to trade below $77/barrel. Copper is unchanged;
Cryptos are down a bit with Bitcoin 2.5% lower to trade in the low $62,000s;
Bonds aren’t doing anything. The 2-year yields 3.95% whilst the 10-year yields 3.85%.
Today’s Known Events
It’s another slow day. We do have a few earnings of interest, but not until after the close. SentinelOne (S 0.00%↑), Box (BOX 0.00%↑), PVH (PVH 0.00%↑), and Nordstrom (JWN 0.00%↑) are among companies reporting.
Case-Shiller home prices are out at 0900. The 20-city index, the most closely-watched of the various indexes Case-Shiller put out, is expected to increase by 6.9% year-over-year, effectively identical to the 6.8% pace recorded last month.
The Conference Board’s consumer confidence reading is out at 1000. A print of 100.2 is anticipated, effectively identical to last month’s 100.3.
Neither of these is known to move markets. In fact, both may be summarily ignored, especially seeing how it’s the last trading week in August.
The Bottom Line
Looks like another slow day, then. It’s very likely we will continue to be in a holding pattern until some of the earnings tomorrow. And really those don’t get interesting until Nvidia (NVDA 0.00%↑) after the close. That seems to be what’s on everybody’s mind…
Stocks on the Contrarian Radar©️
Tech stocks dropped yesterday, for no apparent reason. This is ahead of Nvidia earnings tomorrow afternoon. Indeed NVDA was a big loser yesterday, dropping 2.3%. Bank of America for its part has cautioned that investors “may be underpricing the risk of disappointment” when it comes to Nvidia’s earnings.
Judging by Nvidia’s historical earnings record, this fear is unfounded. NVDA has beaten earnings estimates the last six quarters and 10 of the last 12. This despite analysts continuously raising their targets. As you can tell from the chart, Nvidia has stagnated a bit in recent days, although right near its all-time highs set in July.
Also despite the last couple of days’ stagnation, NVDA has still bounced nicely off of the intermediate low of ~$100 set earlier this month. Quick calculation tells you it’s gained 26% in just a few weeks.
Could tomorrow’s earnings provide the catalyst for Nvidia to push higher? Again, the historical record is in its favor. But then historical patterns are made to be broken. It seems we say this every quarter, but NVDA just can’t keep beating these sky-high estimates for much longer. Can they?
Perhaps the bigger question is whether, and how much, this might impact other AI chip stocks. Take the rest of our Big 7 first: AMD (AMD 0.00%↑), Broadcom (AVGO 0.00%↑), Intel (INTC 0.00%↑), Marvell (MRVL 0.00%↑), Qualcomm ( QCOM 0.00%↑), and Taiwan Semiconductor (TSM 0.00%↑). As you can see these have all tracked Nvidia with one notable exception, namely Intel:
Intel’s issues appear company-specific. While the others track NVDA, they certainly don’t match it in terms of performance! Might that gap be expected to narrow? AMD, for example, is up just 8% on the year. Or will Nvidia continue to hover over the sector like some kind of benevolent monarch?
Turning to our ‘undiscovered’ AI chip names shows very much the same story. These have mostly been tracking NVDA, but here too with less impressive results. Indeed there isn’t just one Intel-type outlier that is down for the year but precisely half of the eight names that are:
A few of these stocks appear to have almost completely uncoupled from Nvidia: Photronics (PLAB 0.00%↑), down 23% year-to-date, Kulicke and Soffa Industries (KLIC 0.00%↑), down 19%, and Ichor Holdings (ICHR 0.00%↑), down 8%. Might these companies have a business that is actually divorced from Nvidia’s?
Quick research reveals these three are in fact suppliers to the semiconductor industry. Which realistically means they shouldn’t be uncoupled at all. KLIC and ICHR reported earnings recently that topped analyst estimates. (PLAB earnings were less recent and do not appear to have analyst estimates). This doesn’t speak to these companies being any kind of leading indicator to the ‘Big 7,’ either.
Assuming then that all this AI hype is real, might this be a buying opportunity for these three names? That could be especially true if Nvidia beats estimates and resumes its rally, but these three do not go along for the ride. Because again, as suppliers to the semiconductor industry, they realistically should.
Indeed PLAB’s primary business appears to be so-called photomasks, a key component in semiconductors. In fact it bills itself as the world’s leading producer of these things. The AI craze has helped its business. But not, apparently, its stock price.
The company is also cash rich, with almost $500 million cash on hand and negative net debt. It trades at just 12x forward earnings, <2x forward sales, and 5x cash flows. That all makes it sound like a screaming ‘buy’ — unless there is something else going on here that such superficial analysis will by definition overlook.
Or unless of course AI hype is not real. But at least then the drop shouldn’t be as pronounced as for the Nvidias and AMDs of the world…
Full disclosure: The Contrarian has a position in Camtek (CAMT 0.00%↑), but not as of yet in PLAB or the other stocks mentioned above.
Housekeeping
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Nvidia Earnings Eve: Opportunity in AI Chip Stocks?