Bull’s Eye: How long can you make a bubble last?
Nvidia was the darling of the boom in semiconductor stocks, falling victim to its outrageous popularity
I have been running a phantom portfolio for the past two-odd years on the EasyEquities platform, a play-play $10,000 spread evenly across 10 stocks. The purpose was to track companies selected entirely on the basis of their price momentum.
I was curious to see what would happen to a “bubble basket” of US-listed equities that were booming despite all fundamental and technical indicators showing they were overbought and due at the very least a sharp correction.
June 2017 was a pretty exuberant time in US markets. Along with the slap-happy stock market, cryptocurrencies had caught the imagination of speculators and ratcheted up in the kind of parabolic price action that gave conservative investors the willies. Those who chose not to dabble in Bitcoin or Ripple cast their eyes slightly sideways, finding companies that either supplied the hardware (semiconductor chips) for crypto mining and blockchain management, or the cloud-based data infrastructure that would house, contain and try to manage the mania.
One such company was Nvidia, duly included in my bubble basket. It was so much more sexy than its major rival, Intel, playing not only with cryptos but feeding its graphics cards into the video gaming craze. Plus its artificial-intelligence chips supplied the automated-driving research pioneered by Tesla that was quickly taken on by all major car manufacturers.
So in mid-2017 Nvidia was nothing less than the darling of the momentum-chasing investment crowd. All the other companies in my bubble basket, save one, represented industries that appeared to have overtaken even biotech as the sectors of the future. The outlier in the portfolio was consumer-goods multinational Unilever, included merely as a proxy for the overall market.
Other stocks were picked from the other hot-patootie sectors that so inflamed the crowd: Alibaba (e-commerce); Facebook (hawk, rake, spit – but it had to be tracked as the leader in social media); Tesla (as an almost entirely speculative gamble); Adobe (software); Paypal (online money transfer); and then a handful of Nvidia competitors in semis and related high-tech goodies – Advanced Micro Devices, Micron Technology, and Broadcom.
All of these stocks, but for Unilever, were going mad two years ago. The bubble basket was boiling. Then came the cryptocurrency blow-off top and meltdown in late 2017, and later a general collapse in US stocks. The final quarter of 2018 was catastrophic, a broad-based flight from risk that prompted talk about looming recession. How soon we forget.
Nvidia, the poster child for not only chip-makers but the Nasdaq as a whole, reported rotten quarterly numbers that suggested the drivers of its remarkable growth were dying down. From slack smartphone and PC sales to cooling demand for gaming, the company’s race looked to have run out of puff.
Last week, Nvidia released new quarterly results that confirmed it was in a slump, not helped by the trade war. The market doled out its punishment: the stock has fallen 18% in May so far. (Intel fell even further: 25% and counting.)
So where does this leave my EasyEquities portfolio? I learnt that tall poppies get pulped. From high-flying sweetheart, Nvidia has lost 5.6% over two years. Less-groovy rivals Broadcom (+11%) and Micron (+17%) held their own, but the biggest surprise was Advanced Micro Devices, mushrooming 123%. The stock is still cheap, about a fifth of Nvidia’s price, which is part of its appeal. But sentiment was the culprit: Nvidia was a victim of its own glossy visibility.
Paypal (+97%) and Adobe (+91%) would have made me smile if it was real money that vindicated my momentum strategy. I would never have put actual cash behind Tesla (-38%) or Facebook (+16%), or even Alibaba (+9.5%). And what of dear old defensive Unilever? Creaking along with a gain of 3.5%. No thanks.
It has been a cool exercise in riding positive price action for as long as it lasts. It sure paid off (in virtual dollars). My bubble basket is up 32% over two years.