AMD Stock Is a Champ But Even They Need a Rest

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Investing is so easy because everything goes up all the time. I say that facetiously, of course, because indices cannot stop making new highs. This is happening in the face of tremendous adversity on Main Street. Therefore it is not a surprise to see Advanced Micro Devices (NASDAQ:AMD) at a new all-time high this week. Remember that AMD stock was the best performer for the past two years of the entire S&P 500.

Source: Joseph GTK / Shutterstock.com

This year, although it’s not the leader, it’s definitely winning up 110% year-to-date. Going into the end of the year it’s going to take a market crash to break this momentum.

Until then, the bulls are completely in charge so the easy trade is to just simply buy the dip. I made this point so many times before and most recently in late September. Those who did buy enjoyed about a 20% rally.

Now the discussions on Wall Street should be more about trading than investing at these altitudes. I’m always optimistic about stocks, but I also am realistic about choosing proper entry points. I am not fishing for a perfect spot but I definitely want to avoid the frothy ones.

AMD Stock Is Great, But What About the Wedge?

When a stock chart looks like the one for AMD, it’s not an obvious point of entry. Sharp wedges like that are susceptible for surprise dips. That doesn’t mean it can’t go up from here, it just isn’t a clear buying point. It makes no sense to buy a stock this late in an extension.

Fundamentally, I like the story of this tech stock. The side benefit of the 2020 pandemic is that the world is now in panic mode to get digital. This puts a lot of demand on everything tech. Therefore, there will be high demand for products and services from AMD and its competitors for years.

It is hard to make a bearish case against it even if it has a three-digit price-to-earnings ratio. There are skeptics who cannot fathom the idea that a high P/E is not a reason to blindly short a stock. Sometimes it’s not the proper metric.

This growth group requires alternative judgment methods for value. Buying a cheap stock like Intel (NASDAQ:INTC), for example, gets you mediocre stock results. Case in point: AMD and Nvidia (NASDAQ:NVDA) stocks are up more than 100% this year while Intel is languishing -12%.

I contend that AMD stock is the cheapest of the three even if it has the highest P/E. AMD stock investors are more realistic about the future stock price than NVDA. There are only 14 years worth of sales baked into the stock price now. Compare that to Nvidia’s price-to-sales of 23x.

Buy the Dip Has Worked for Ever

Source: Charts by TradingView

They say that beauty is in the eye of the beholder. And to my eye, AMD stock has the best balance of growth, value, and price expectations.

Before you rush to buy it, you might want to consider Nvidia first. It makes for a better buy just from a stock chart perspective. AMD is at the tip of a very steep rising wedge. It would make a better buy closer to $88 per share. Nvidia, on the other hand, is stuck in a very tight sideways range and will inevitably experience a burst soon. The direction of the move is still unclear. But as long as the buyers are control of the overall market, I bet it’s up. Nvidia has two bullish triggers at $540 and $549 per share.

Both cases will yield results if you have patience. I am a big fan of AMD and will wait for the dip to buy it. I remember in March when stocks were cratering, I collected $2.20 for selling the AMD $20 put options. Clearly that was a winning bet and one of the easiest trades of the year.

As easy as that one was, buying today is the exact opposite. I’d wait out because I’d rather miss out on upside than buy an interim top. Decisions differ based on investors’ time frames. There are no one-size-fits-all investment strategies. Today is quadruple-witching Friday and the experts have warned us to expect potential doom. Maybe it’ll happen in the afternoon, but I am not holding my breath.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Nicolas Chahine is the managing director of SellSpreads.com.

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