The Biggest Bargain in AI?

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In this Digest:

• How SMCI went from mega-overbought to a 5-year oversold low…
• Stock split aside, let’s see if it’s a buy…
• A new (old) opportunity on oil & gas stocks…
• Where I stand on a U.S. recession…
• The solution: swing trading…

Investors in Super Micro Computer (SMCI) have had something of a turbulent year…

Back near the start of 2024, SMCI was the stock you couldn’t stop hearing about. Mainly because it just kept going up, and going up quickly.

That’s understandably enough for some people. But it’s still important to talk about why SMCI caught such a big bid – and whether it’s a buy now, more than 50% off its high.

You could call SMCI second chair to Nvidia (NVDA) in the tech space… at least in terms of size and name recognition.

Where NVDA was the top dog chipmaker helping power the AI revolution, SMCI were the guys that investors assumed would build out all the server infrastructure to really make it possible. (Disclosure, I own both NVDA and SMCI.)

And even if NVDA’s year-to-date performance back in March was impressive, it had nothing on SMCI. From the start of the year to its peak, SMCI returned investors over 319%. That’s compared to “just” 87% in NVDA.

We can chalk SMCI’s big outperformance to its size. At the start of the year, SMCI had a market cap of less than $20 billion. That’s compared to NVDA, which was over $1 trillion. The smaller the stock, the faster it’s likely to move under the influence of billions in capital.

Regardless, both are impressive, each crushing the Nasdaq 100 both then and now and making returns that would normally take years, if not decades, to achieve. (As we applauded back then, our very own Jason Bodner saw the situation for what it was and closed out a third of his recommended SMCI position in February near the highs. Even now, the position is up 105%.)

Now, investors face a reckoning. SMCI is well off its peak, cutting that year-to-date gain by an immodest third. NVDA, too, is off a bit but not as much. And it’s now actually beating SMCI for the year.

As a regular reader of this fine newsletter, your gut take might be that SMCI must be oversold. And you’re right. You might not even know how right you are until you check the Relative Strength Index (RSI).

During the depths of last week’s selloff, SMCI clocked an RSI level of 21.44. That’s one of the most oversold readings ever… and the lowest since 2019. Even the Pandemic Crash of 2020 wasn’t this bad.

And that’s coming off an eye-watering 97.5 on the RSI back in late February – easily the highest reading I’ve ever seen.

Even now, at an RSI of about 30, it’s one of the most oversold stocks in the S&P 500.

Is SMCI a buy? Let’s look at it three ways…

From one very logical perspective, buying SMCI at $562 is a heck of a lot better than buying it at nearly $1,200.

If you like the company now as everyone seemed to back then, you’re getting a roughly 50% discount on it. Far from shabby.

Another compelling reason is it’s set to split its stock 10-for-1.

Our readers know that while stock splits have no real impact on an asset’s value, they aren’t done just for kicks. Stock splits reduce the sticker price on stocks, making them more attractive to traders with smaller account balances. And we’ve shown in the past that, despite their seemingly zero-sum nature, they foretell big price rises.

But we can look at buying SMCI in another way – just how oversold it recently got.

Buying stocks that hit wicked oversold conditions is a great way to trade. At the very least, you’re usually going to get a strong bounce in the opposite direction.

I recently conducted a study on this strategy using S&P 500 stocks. I wanted to know the average gain of buying any stock in the S&P 500 – to which SMCI was recently added in March – going back to 1949.

We’ll assume you bought and held the stock for 21 trading days after it crossed below the 30 level on the RSI, then sold it.

When looking at all S&P 500 stocks, including all the times it’s happened on each stock, you get a positive, but slight win rate of 58.25% and an average gain of 2.3%.

Looking specifically at SMCI, the stock has plunged below a 30 on the RSI just two times since 2020. Both times the stock was higher 21 trading days later… for an average gain of 24%.

The broad bias on oversold stocks is bullish. And the data shows that this effect is amplified when you look at rare gems like SMCI for upside trades.

A brand-new, free research report for you…

Over the last few weeks, my team and I have been busy compiling a research report on an investment opportunity that’s incredibly important… potentially very profitable… and when you look at the facts, glaringly obvious.

Regular readers know I’m a long-term bull on oil and natural-gas companies. There’s plenty of reasons why, both zoomed-out and zoomed-in: Emerging economies are growing much faster than the capacity for renewables, the sector is dirt-cheap and pays great yields, and many more.

We’ve written about this plenty in the past, but we took the time to compile our best research on the topic into this research report. With it, you’ll learn about five high-quality oil & gas stocks trading at historically cheap valuations… and a strategy you can use to draw continual income out of these stocks over time.

The link to download it for free is right here. Feel free to share that with your friends, family, and anyone else that could make use of it.

Consider it a “thank you” for being a dedicated reader of this newsletter, which we work so hard on every day.

And keep your eyes peeled for more on this subject, along with new research reports soon to come.

Why I think we’re in a recession…

I won’t get any brownie points for saying this, but I’m fairly confident the U.S. economy is in a recession, albeit one that’s relatively mild and hard to see (for now).

And I’ve had this view for a few months now. What set me off was a poll that released earlier this year, showing that Americans had a very different view of the economy than what appeared to be true on the ground. As I wrote then:

Last week, scores of mainstream journalists were left dumbstruck by a Guardian-Harris survey of Americans about the economy.

56% of Americans currently believe the U.S. economy is in recession. 49% of them believe the S&P 500 is down for the year. And the same number think unemployment is at a 50-year high.

[…] If your first instinct is to simply conclude that half of Americans are just misinformed and pessimistic, potentially for political reasons, then I’ll ask you to take a step back and really think about what these stats mean.

[…] Most Americans are struggling and feeling left behind. It feels like a recession. It feels like stocks are down. It feels like everyone is losing their job.

This feeling that things are bad… it’s not “wrong.” Things are bad for quite a lot of people. And chances are, a big chunk of that 56% number is the amount of people suffering right now.

To me, this insight quite simply overrides the hard numbers. How people feel – regardless of the facts – informs how they behave. And how people behave has huge implications for the economy going forward.

If people think we’re in a recession, they’re going to act like it. And that might just make a recession a self-fulfilling prophecy.

Could a rate cut fix this? To some degree, yes. But my gut tells me that the Fed will continue to not meet investor’s rabid assumptions about the pace of rate cuts this year and into 2025.

The entire purpose of the rate hikes from the past cycle was to tame inflation. Until now, the economy has held up against those hikes well.

But the purpose of cuts is not to goose stock prices – that’s just a byproduct, and potentially not even a long lasting one. It’s to carefully guide the economy back toward a more neutral level.

What I’m saying is there’s cracks in the foundation we cannot ignore. Unemployment is rising, retail giants are feeling the squeeze, and Americans predominantly feel strapped. That trend won’t reverse on a dime.

Finally, we can’t forget that, seasonally speaking, there’s more volatility on the horizon. We can’t assume that it’ll be different this time just because we all want it to. The market could well spook us again.

To be clear, that doesn’t mean we should throw up our hands and stop investing. It’s certainly possible that the stock market climbs higher through a recession, as it has done before and we showed you recently.

It’s even more likely that oil & gas companies, being undisputable essentials to the world economy, would face fewer headwinds and even thrive in such an environment.

And no matter what kind of market we’re in, trading otherwise quality stocks facing steep, rare oversold conditions is rarely a bad idea.

And that leads me to one great strategy we’re highlighting at TradeSmith this week…

One great way to combat that is with “swing trading”…

William McCanless of Trade Cycles had some great trades on the United States Natural Gas ETF (UNG) recently.

William’s what we call a “power user” of TradeSmith for his swing trades, particularly our seasonality and cycles tools. That historical data indicated that natural gas had risen 70% of the time between April 2 and June 15 over the last 30 years…

So, William recommended a call option on the United States Natural Gas ETF (UNG) that produced a 26.8% gain in 40 days.

What’s even better is – TradeSmith alerted him that natural gas then goes down 70% of the time between June 13 and July 8…

So, Trade Cycles pivoted to buy a put option on UNG and made 71% in 25 days.

You can see the versatility for yourself by checking out this presentation where William walks through his entire system, including how he finds seasonal trades, each tool he uses to scan for opportunities in TradeSmith, and how he qualifies trades and manages risk.

You can watch it for free at this link. And I’ll be interviewing William soon here in TradeSmith Daily to talk about these very topics. Traders like us love “talking shop,” so it should be a great discussion.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith