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Wall Street went nuts yesterday over semiconductor stocks. Micron (NASDAQ:MU) — for example — spiked 4.4%, while the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) was also up 1.8%. Strangely, the three main chip stocks that had been strong drivers fell, but they remain the better bet going forward.
I have been a long time fan of AMD stock, and I’ve written many times about catching almost every substantial dip. I have even written about doing the same for MU stock, but only when all the experts hated it.
My caution stems mostly from extrinsic factors, nothing against the companies themselves. Again, I stress that I remain committed to buying dips in these great stocks. In fact, the last time Wall Street was hating them, I wrote about the upside opportunity that paid the bulls very well. Keep that in mind later if you get the impression that I am a perma-bear on tech.
The devastation in businesses across the planet is the first of its kind. Never before has the world stopped working on demand and for this long. That said, it is not a surprise to see governments spending maybe as much as $50 trillion to emerge from this depression. The fact that we’ve never seen this before should raise concern. Yet, the actions on Wall Street are astonishing.
Some experts call it courage, but I think it is premature confidence and borderline recklessness. We need proof that the new normal is going to be good enough. The business cycles are different between sectors, but in the end they are all tied. If we have sustained periods where 30 million people are out of work, then there won’t be many tech upgrade boom cycles
Semiconductor Stocks to Trade: Advanced Micro Devices (AMD)
AMD stock is the king of the S&P two-years straight, so I have to respect its price action.
The weakness it showed yesterday should concern everyone, especially in tech stocks. When a leader hesitates, there usually is a reason why. I’ve used AMD stock as a gauge for risk appetite for a while, and it has rarely lied to me. Investors should still buy the dips in it, but rushing in now is fraught with danger. Nothing has changed regarding its prospects, though, and that is part of the thesis.
The world is just emerging for the biggest mess on record. There is no chance we go back to prior conditions this year. And while I do like the fact that semiconductor stocks sales cycles are not as closely tied to retail, they definitely depend on consumer spending. So if the world doesn’t go back to full employment, that cycle will remain stifled.
The good news for AMD is that it has excellent leadership. The bad news, however, is that it is not a cheap stock. It has a three digit trailing price-earnings (P/E) ratio, and that means that it has a lot of fat to shed during economic trouble. Wall Street has tremendous confidence in CEO Lisa Su, but if the world is broken she can’t fix that part alone.
Once again, I remind you that I am merely tempering enthusiasm not calling for an outright short.
Editor's Note: Click here for the other two stocks.
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