Lowe's (LOW) reports earnings next Wednesday. Stifel cut the stock to sell from hold and lowered its price target to $190 from $195, arguing Home Depot's (HD) core business is better placed while Lowe's faces challenges that need spending above what investors expect. Shares rose 8% that morning.
Nvidia and the chip selloff
Nvidia (NVDA) shares ticked higher in pre-market after dropping as much as double digits the prior session. A large amount of bad news is now priced in. Chip orders look locked into the pipeline through 2027 and possibly 2028, giving the company strong built-in momentum. The exit of Steve Jobs from Apple (AAPL) is a useful comparison: Apple's product pipeline at the time carried the company through the next few years, and the same pattern could hold for Nvidia now.
The CFO, Colette, is stepping into the top role on an interim basis. Some are floating a Tim Cook type figure for the permanent job. Running a company this size takes far more than one person, so the board should hand control to the right steward. A leadership change can actually help Nvidia's rivals. AMD (AMD) is one name to watch. This is a stealth rally - a broadening trade that reaches past Nvidia to other semiconductor makers and to the wider index.
The historical case for buying
I rotated out of semiconductors in May of this year into software, which worked well. Now I am doing the reverse. Semiconductor stock prices have had the sharpest undershoot relative to revenues in recorded history. That sets up a classic short covering rally or mean reversion trade, where prices have already discounted a catastrophe that is unlikely to arrive. The selloff looks overdone while US semiconductor billings are growing over 200% year over year. The recent news and scandal improve the timing and the risk reward payout.
Stocks discount the future. Highly liquid, high velocity, super cyclical parts of the market - semiconductors and financials - can overshoot hard on bad news. Here the market is pricing a capex cliff, a sharp drop in chip spending, which is not a realistic outcome. With so much bad news already in the price, only a small beat on expectations is needed to spark a mean reversion rally. Watch Nvidia's release next week and pay close attention to the guidance.
A comparison from financials: during the Wells Fargo (WFC) account scandal, the CEO was grilled before Congress, a new CEO came in, and the stock recovered. There have been calls for Jensen Huang to appear before Congress. The main lens is not scandal itself but how fast bad news gets priced in and then reverses.
A broader market
This fits a tech enablement thesis and a market no longer driven by just seven big companies. It is now about the other 493. The equal weighted S&P 500, tracked by the RSP fund, has held up and is doing some of the heavy lifting. It should be a core long-term holding for many investors, so watch that stealth rally.
