The markets are trending lower Thursday and the selling pressure is picking up steam in the late afternoon. The action may not be purely rotational, but the selling is certainly lopsided against mega-cap tech stocks as profit-takers have come in and sold down the tech names that worked the best throughout the pandemic.
There are two things we can say about today's afternoon pressure and the sell the news/priced to perfection reaction to Microsoft's (MSFT) better than expected earnings report.
First is that we cannot be afraid to trim our tech winners and market darlings from time to time. We demonstrated this recently through trims in portfolio stalwarts Microsoft here, Nvidia (NVDA) here, and even Amazon (AMZN) here. The outlooks for all three remain bright, but bulls make money, bears make money, and hogs get slaughtered as we all know well.
Second, what the continued one-sided action on a daily basis tells us is that we have to maintain a portfolio barbell with tech and the Covid-19 winners on one side, and those that benefit more from a vaccine and the economic reopening on the other. Leaning too heavy to one side over the other may leave you exposed to the viciousness of these rotations, and always address your suitability as Jim answered on the final club member question during last Wednesday's members-only conference call. You can find the replay to the call and transcript at the link here.
Although technology is out of favor in today's session, one stock we want to highlight is Advanced Micro Devices (AMD) . As mentioned in today's Daily Rundown that you can watch the replay to here, RBC Capital put a new Street high price target of $71 on AMD. The analysts raised estimates ahead of next week's earnings report and suggested PC and Server revenues could be a source of upside. The analysts may be taking their cue from the earnings of Texas Instruments (TXN) . The giant semiconductor reported two nights ago and talked about how work from home trends drove strong demand for PCs, tablets, and servers - all areas where AMD operates.
Additionally, we got a pretty good readthrough on data-center spending trends last night when Microsoft reported earnings. Microsoft told a story that suggested no slowdown in capex spending related to cloud/hyperscale data infrastructure and management reiterated their commitment "to invest to meet that demand ahead of the curve."
According to analysts at JPMorgan, Microsoft probably won't be alone in terms of elevated spending trends. "We believe the other cloud/hyperscale titans are going to spend in a similar fashion driven by the work-from-home/on-line "everything"/business continuity surge that is driving significant increases in data traffic and demand-pull for compute workloads," JPMorgan said in a note this morning. As we look towards the back half of the year, we think it all represents another positive check for AMD, as well as other players in the portfolio like Nvidia and Broadcom (AVGO) .
Given the strength in AMD's core markets as told by Texas Instruments earnings and Microsoft capex patterns, plus the PlayStation 5 production ramp we talked about last week in our Alert here representing a 2H2020 catalyst that still looks underappreciated in our view, we think this stock still has earnings upside-related room to run despite all the profit-taking action that is picking up this afternoon. We are increasing our price target to $65 and will reassess again next Tuesday when the company reports earnings.