After you receive this notice, we will make the following transactions:
–Sell the remaining 310 shares of Nvidia ( NVDA ) at or near $144. This will close the portfolio’s NVDA position, which has returned more than 170% since it was added to the portfolio in June 2019
— Buy 370 shares of First Trust Nasdaq Cybersecurity ETF (CIBR) at or near $42.40. After the trade, the portfolio will hold 2,590 CIBR shares, approximately 3.15% of the portfolio
— Buy 90 shares of PepsiCo (PEP) at or near $170.50. After the trade, the portfolio will hold 650 shares of PEP, approximately 3.17% of the portfolio
— Buy 95 shares of Vulcan Materials (VMC) at or near $164.50. After the transaction, the portfolio will hold 305 shares of VMC, approximately 1.4% of the portfolio
The unexpected news that the U.S. government imposed a new license requirement on Nvidia for any future exports to China and Russia for certain products has increased uncertainty not only for about $400 million, or about 7%, of Nvidia’s sales for the current quarter, but also in revenue in the following quarters. Accordingly, we are exiting NVDA stock here on Thursday morning. Nvidia noted that the new license requirement may affect the company’s ability to timely complete development of the H100 or support existing A100 customers, and may require the company to move certain operations outside of China.
In our view, this latest development, in addition to continued weakness in the gaming market and risks of a slowdown in business spending that could slow data center chip demand, skews the risk-to-reward profile for NVDA stock to the risk side. Similar to why we reduced the portfolio position in NVDA stock due to concerns ahead of the July quarter earnings report, here again we would prefer to be prudent investors, locking in the gains rather than watching them evaporate further in an uncertain market .
Technically, the NVDA chart shows lower highs and lower lows with a range of distribution over the last few months. With the seasonal trends bearish and a strong investor aversion to anything semiconductor-related, there are lower targets for NVDA. The moving average convergence divergence (MACD) is in a sell signal and money flow has retreated over the past month into negative territory. The $125 area could be a good support area, but there isn’t much help for the price below that area until around $105. We don’t want to be part of this situation. On the other hand, if NVDA can manage a rally and rise above $195 (heavy lifting), that would indicate that the bulls are in control and we would consider a move back.
As we make this move on NVDA shares and add them to the bullpen for future consideration, we’ll also downgrade shares of Advanced Micro Devices (AMD) to a two-of-one rating given the risk of similar headwinds, if only visually. AMD has already shared that US officials have asked it to stop shipping AI 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. This has led AMD to conclude that it does not expect to see a material impact from new license requirements. However, given the current market mood, AMD stock is likely to face a “shoot first, ask questions later” environment, and that puts us on the sidelines with AMD stock.
In light of the Biden administration’s new efforts to crack down on China, and given our position in Applied Materials ( AMAT ), we’ll be on the lookout to see if he extends this new licensing requirement to semiconductor capital equipment as well.
We are using the returned capital associated with the NVDA trade in shares of the First Trust Nasdaq Cybersecurity ETF, PepsiCo and Vulcan Materials to enhance the portfolio’s exposure to cybersecurity as well as infrastructure spending while consolidating the beverage and snack businesses at PepsiCo. The moves with CIBR and VMC are consistent with our strategy of using pullbacks to increase position sizes at favorable prices, while the addition to PEP also increases the portfolio’s dividend flow much more.