In Case We're Wrong About Nvidia
Summary
- Nvidia was a Portfolio Armor top name in January of 2016, and has been periodically since then, including on February 22nd, when it appeared in my top names subscriber post.
- Since then, it's up modestly, but questions have been raised about whether it's gotten too pricey.
- For investors looking to stay long while limiting their downside risk, I show a couple of different approaches.
Nvidia booth at Computex (credit: Ymodtech)
Too Pricey Now?
Nvidia (NASDAQ:NVDA) was a Portfolio Armor top name back in January of 2016, when it was trading at under $28 per share, as I noted in an article last year (What Happens When We're Right). It was also a top ten name as recently as February 22nd of this year. It's up since then, but more modestly. Last week, Seeking Alpha contributor Rong Huang, CFA raised the question of whether Nvidia was overpriced.
Although he concluded its growth story justified a higher share price, here I'll show a couple of ways NVDA shareholders can stay long while limiting their risk over the next several months, in case the market gets second thoughts about that growth story. First, let's recap how NVDA and the rest of my February 22nd top names cohort have performed since then.
Nvidia And Our February 22nd Top Names
Each week since June 8th of last year, I've been presenting Portfolio Armor's top names to my Bulletproof Investing subscribers. These are the names that, out of the subset that are hedgeable against single-digit declines, the site estimates will have highest potential returns over the next 6 months. So far, their 6-month performance has been fairly strong, as you can see in the table below (clicking on a starting date will pull up a chart showing the individual names that week, and their performance).
| Starting Date | Portfolio Armor 6-Month Performance | SPY 6-Month Performance |
|---|---|---|
| June 8, 2017 | 14.49% | 9.99% |
| June 15, 2017 | 19.85% | 10.97% |
| June 22, 2017 | 24.46% | 11.27% |
| June 29, 2017 | 18.24% | 11.68% |
| July 6, 2017 | 21.03% | 14.81% |
| July 13, 2017 | 28.25% | 14.85% |
| July 20, 2017 | 25.04% | 14.62% |
| July 27, 2017 | 33.52% | 17.10% |
| August 3, 2017 | 20.72% | 12.66% |
| August 10, 2017 | 13.05% | 8.36% |
| August 17, 2017 | 10.71% | 13.48% |
| August 24, 2017 | 15.23% | 13.72% |
| August 31, 2017 | 8.42% | 10.87% |
| September 7, 2017 | 12.75% | 11.61% |
| September 14, 2017 | 29.19% | 11.19% |
| September 21, 2017 | 22.56% | 9.42% |
| September 28, 2017 | 14.30% | 4.73% |
| October 5, 2017 | 11.53% | 5.26% |
| October 12, 2017 | 15.46% | 5.38% |
| October 19, 2017 | 20.73% | 6.08% |
| October 26, 2017 | 18.10% | 5.13% |
| November 2, 2017 | 12.64% | 3.11% |
| November 9, 2017 | 5.41% | 5.34% |
| November 16, 2017 | 6.11% | 6.22% |
| November 23, 2017 | 5.18% | 6.19% |
| November 30, 2017 | -0.19% | 3.80% |
| Average | 16.41% | 9.53% |
The February 22nd cohort will be added to that table on August 22nd, but here's what it looked like when I posted it on Bulletproof Investing then:
NVDA's performance since then has been in the middle of the pack:
NVDA is no longer a top Portfolio Armor name (it's currently #111 on the site's daily ranking), but the site still estimates a potential return of about 22% for it over the next 6 months. In the event it's wrong, let's look at a couple of ways you can limit your risk while staying long.
Limiting Your Risk In Nvidia
Let's assume you're long 1,000 shares of NVDA and are unwilling to risk a decline of more than 20% over the next several months. Here are two ways of hedging it (screen captures below are via the Portfolio Armor iPhone app).
Uncapped Upside, Positive Cost
As of Friday's close, these were the optimal puts to hedge 1,000 shares of NVDA against a >20% decline by late December.
As you can see above, the cost here was $8,800, or 3.42%, calculated conservatively, using the ask price of the puts.
Capped Upside, Negative Cost
If you were willing to cap your upside at 20%, this was the optimal collar to hedge against the same >20% decline over the same time frame.
There are two things different about this hedge. The first is that, after an iterative process taking into account its net cost, the hedging algorithm was able to find a less expensive put strike, one that lowered the cost of the put leg to $6,600, or 2.56% of position value (calculated conservatively again, using the ask price of the puts). The second is that cost was more than offset by the income of $8,800, or 3.42% of position value, generated from selling the call leg (calculated conservatively, at the bid).
So the net cost was negative, meaning you would have collected a net credit of $2,200 when opening this hedge, assuming you placed both trades at the worst ends of their respective spreads.
Wrapping Up
The last two years haven't been kind to those who've bet against Nvidia, but there's always a risk the stock could suffer a pullback over the next several months. Both of the hedges above offer Nvidia longs a shot at additional upside while strictly limiting their downside risk. They might be worth considering.
To see this week's top 10 names, you can sign up for a free two-week trial here.
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.