Analysis: NVDA INTC HON

Shortly after the opening bell, we will be selling 100 shares of Nvidia (NVDA) at a bid/ask of roughly $283.65/$283.88. In addition, we will be closing our position in Garrett Motion Inc (GTX), selling 90 shares at a bid/ask of roughly $17.70/$19.00. Following the trades, NVDA (100 shares) will represent 0.98% of the portfolio.

Nvidia

In Friday's Weekly Roundup, which you can read here, we described two concerns we have with Nvidia. The stock's 5% move on Friday off an analyst price target revision did not cloud this view, and below you will find our reasoning behind our downgrade to a Two.

"We have been discussing this position intensely given its outperformance versus peers in the semiconductor industry. We have also been discussing something members have heard us speak about previously, that it normally takes two-three years before software is developed that can take full advantage of next-generation hardware, in this case the company's new Turing architecture.

"Compounding the potentially slow transition are reports of a supply shortage in the CPU market that could last into the middle of 2019. The reason this is important is because if CPU supplies are short, then there are less GPU-containing computers being supplied. 

"And while Intel (INTC) management did note on Friday that they "continue to believe we will have at least the supply to meet the full-year revenue outlook we announced in July" alleviating some of our CPU-related concerns, we still view this as a potential headwind as we approach the end of the year and investors point their attention to 2019.

"And while the "recent launch of high-end graphics cards containing the company's new Turing-architecture gaming GPUs should help prop up its sales" according to The Street's Eric Jhonsa, here, we believe that the stock's move higher on relatively little news since the last quarter earnings call is a reason to book profits and give ourselves increased optionality should shares pullback."

In short, we see an industry headwind and a slow GPU transition period up ahead for Nvidia. These two trends will make it tough for the company to deliver results that show it is firing on all cylinders, a likely requirement when the stock is at its all-time highs. Therefore, we are trimming our position in half and locking in a terrific gain of 76% to protect against a period of slowing growth.

That type of gain over a roughly 14-month span is no small feat. The position has been an excellent win and we have persevered through countless calls that the run in the stock was overdone. Each time, those were proven wrong. We still like the name for the longer-term, but sometimes you have to take your wins and not be greedy, especially when a transition period is up ahead. Lastly, while this may seem trader-like in nature, we believe the volatility in shares of a name such as this justifies a tactical move based on short-term concerns

Garrett Motion Inc.

Moving on, on Monday, Honeywell (HON) completed the spinoff of its transportation business and created the newly traded company, Garrett Motion Inc. The terms off the spinoff are 1 for 10, meaning that for every 10 shares held of Honeywell, you will receive 1 share of GTX. For example, the AAP portfolio will continue to own 900 shares of Honeywell (i.e. the number of HON shares owned at close on Friday), but now received 90 shares of GTX. We will be selling those residual shares off this morning.

As we have said before, GTX was never fully in our cards because we believe Honeywell's RemainCo is the real gem. Following the completion of this spinoff and its Homes business by the end of the year, management will have decreased its end market exposure to six from eight, and all six have strong appeal from an investment perspective.

For Garrett Motion, we'll be following up on this note later with additional details (e.g. on cost basis for Honeywell and more details on Garrett for those who wish to hold), but we wanted to let members know the dynamics of the trade.

Please note that we will be updating the AAP website accordingly (adjusting HON cost basis and adding then removing GTX shares to the portfolio), but the transaction takes some time to flow through on the back-end. We are working to do so as early as possible this morning, technology permitting, and we will keep subscribers updated on when the changes are live.