AMD outperformed every other stock in the market last year by a huge margin. While this scares some people, especially in the face of a big pullback, AMD continues to shine.
There is a strong belief among many investors that stocks that go up a lot are ripe for a correction, where they somehow see the stock as “overvalued.” It’s hard to find a better example than AMD in 2019, both in absolute terms, the 241% it gained last year, as well as in relative terms, where it not only beat every other stock in the market, it absolutely creamed them and more than doubled anything else.
This stellar performance had us selecting AMD as our top pick for 2020, which surely must have had some people cringing. At best, many may have been thinking that this might continue to do well as long as the bulls continue to run, but if they stop, look out, thinking that AMD may even be in a class by itself as far as stocks ripe for a fall.
AMD in 2020 is actually a very good study in how these things play out, and why we need to cast off our notions that stocks that have done extremely well need to be approached with extreme caution, thinking that what goes up a lot more must come down a lot more.
The bears did come, and AMD took a big hit for a time just like virtually every other stock did, and from its 2020 peak to its bottom, matched the 35% hit that the market took. That’s where the comparisons end though.
The fact that AMD only lost 35% is actually a triumph of sorts and speaks well against the argument that very hot stocks lose more during pullbacks like this, especially ones that are this large. A bear market involves a 20% pullback, and this was almost twice that, in an atmosphere of panic that we have not seen since 2008.
If there was a scenario that people would be worried about a stock like AMD, this was it. What makes AMD so special here is that we don’t need earnings to take off this much to see a stock go up this much, as a stock’s price factors in earnings much further down the road than just the next quarter or next year, but AMD’s earnings actually went up so much last year that this great rise in price actually understated the increase in earnings.
AMD started the year by earning just 6 cents in the first quarter, but there was a lot of promise of this going up. By the fourth quarter, earnings had risen to 32 cents a share, a 533% gain versus the 241% price move. We never just go by that though, as their ability to sustain this growth was very much in question, so this 532% certainly got watered down as it should have, because this is about more than 2019 or 2020.
The way value investors look at things though, with their huge focus on present earnings relative to a stock’s price, by this measure, AMD increased in “value” throughout the year, right to the end. If you like this sort of value in your stocks, AMD should have excited you like no other last year, not scared you away so much.
It’s the monumental price move that a lot of people found scary though, and if we visited the future at that time and told them that we’d have a 35% market pullback, and AMD’s earnings would drop from 32 cents to 18 cents, on significantly lower revenues than expected, that would certainly scare the daylights out of these investors.
While current earnings do matter, they are only one piece of a much bigger puzzle, and we don’t want to just assume that seeing AMD’s earnings drop this much over a quarter will put them down very much, or even keep them from moving further ahead. It wasn’t the earnings projections in 2020 that had us liking this stock so much, loving it so much even, it was the fact that the market saw so much long-term value in it, as the move up in price made clear.
Momentum isn’t just based upon current results, or near-term expectations, longer-term expectations play a big role as well. We need only refer to Tesla to show how powerful a force this is, and all it took was not losing money to send the price of this stock skyward.
Since the market does indeed account for the future, this is actually not only the secret sauce of strong momentum stocks, it’s the burger itself, with the present representing the condiments. This makes perfect sense when you realize that most investors aren’t just attracted to a stock and bid it up because it will do well next quarter, they are mostly focused on a great many more quarters than the next one.
This phenomenon had AMD picking up where it left off in 2019, enough that when this 35% pullback hit, the move left the stock only down 14% at the bottom in March. Having it in a better position in the future also propelled it further up once the bounce hit, and it now sits not down for the year, but up by 13% instead.
AMD’s bounce was even better than this, as they were up 23% on the year right before their earnings call on April 28. Seeing their earnings drop from 32 cents last quarter to 18 cents was on target with the expectations of analysts and was already priced in, if being up 23% on the year could be deemed to be pricing in a big earnings drop like this, which tells us clearly that more than just current earnings drives the stock, and stocks in general.
AMD Continues to Perform Like a Champ in 2020
While earnings were in line, revenues being off by a good margin and other aspects of the call did serve to put the stock down to where it is only up 13% in 2020 now, although only up that much still qualifies it as an elite stock this year.
AMD’s story this year becomes even more impressive when we remember that we are in the midst of a financial crisis, with the S&P 500 still down 15% even after its quite remarkable recovery in the midst of it. While so many would have expected AMD to suffer worse than the market under such a grim scenario, it has instead done much better, by 28% so far this year.
The drop was as easy of a pullback to call as there ever was though, and the alarm bell that we rang very early on in the move was no great feat at all, with the air so thick with fear. Making the call with getting back into stocks required much more skill, but it really wasn’t all that difficult to see a base building for a rebound and those who followed this advice were very well rewarded, including timing AMD that way.
In addition to looking at the market though, you still need to keep an eye on the individual charts, and seeing a wave of panic starting to emerge and getting ready to unleash its force upon stocks in general, plus seeing AMD drop 10% in just 2 trading days was more than enough for a call to arms.
Once the bottom hit on March 18, you do need some confirmation of this likely being the bottom on the charts, but March 24, the day we called the reversal with stocks in general, was plenty of time, with AMD already up 18% from its low.
While skilled traders did not have to wait quite as long as seeing AMD drop by 10% to get out and move up by 18% to get back in, this is aimed at more armchair folks to see what additional gains would have been possible using a more conservative approach that did not rely on much skill to spot.
You really had to be on your toes to get out on the day before and save yourself quite a bit of slippage, and this strategy that we gave you at the beginning of the year, getting out when it pulls back by 10%, wasn’t done to set you up as a good trader but to instead provide a margin of safety, and as it turned out, these two down days early on in the panic turned out to be exactly 10%. The real deciding point isn’t the 10% though, it was that combined with the terror out there, and together, this was as persuasive of a reason to get out as you will ever encounter.
It is notable that no matter how badly AMD did for the rest of the year, this strategy would have had us booking in a 16% profit in less than two months and had this money in our pocket instead of exposed to this viral panic or anything else that may have happened to the stock prior to our giving it a clean bill of health again.
Waiting for it to rebound by 18% might seem a little much, but keep in mind that this strategy is aimed at investors who want to stay in for the stock all year long ideally and only get out when things really start to look bad, and February’s sell-off qualified if anything would. We need to be more careful as non-traders when we re-enter though, because the goal isn’t to have your finger on the trigger throughout, getting in and out multiple times as moves fail, and looking for market confirmation of the bottom was very reasonable here in spite of AMD catching fire sooner.
Using this fairly conservative exit and re-entry, this still served to provide us with an overall return of 28% so far, in comparison with the 13% that those who held it all year got. The extra 15% that could have been had by trading it rather than holding on is nice, and although the main benefit of this is managing risk, it wasn’t really that scary to hold on to it if that was your preference, and it certainly has done very well in comparison to just about every other stock in the market.
We Should Not Be So Afraid of Great Stocks
If a stock can beat the market by over 200% in a year, get hit with a worldwide economic shutdown, experience a massive sell-off, have a relatively poor earnings call, and still be up 13% on the year, impressive might not be a strong enough word.
The fear of chasing high flying stocks is the real issue here, and when we look at this, the beating the market by 200% goes in the asset column, not the liability one, and its majestic performance in 2019 is what had us excited about it enough to make it our top pick for 2020.
Momentum is really what it is all about these days, and as it turns out, even in the face of massive pullbacks. This is not just limited to the strongest stocks like AMD, we’ve seen this in other momentum stocks in general, and is why the Nasdaq, which has more of them, is up for the year while the S&P 500 and Dow are still down around 15%.
As long as the future remains bright for a stock, it will take a lot more than a panic to unseat it, as this goes to its relative value when all stocks are under such pressure. AMD was better before and still is. When the chips are down, their overly positive outlook in the future will serve to help cushion the blow if anything.
Those who think stocks have some sort of fixed real value and as stocks propel past that, they are somehow overbought, will remain lost. This idea ignores the one thing that separates great stocks from mediocre ones, accounting for not only 2020 but well beyond that, what investors are really interested in. Investors still love AMD a lot more, and as long as they still do, measured by the differential with the average stock, love does conquer in both life and in the stock market.
AMD has now passed competitor Intel in terms of their figuring out how to make better chips, and while Intel’s stock being only a hair in the red this year is considerably better than the market, AMD beating it by 13% so far, in addition to the 228% that AMD beat Intel’s stock by in 2019, shows how much the market recognizes AMD’s better future prospects.
While many tirelessly pore at company data, there’s a much easier way to measure all this, and you really can’t measure the future that well by just looking at the recent past and near-term projections anyway. The market gets the final vote and hold the only vote that matters, and like with political contests, those in favor tend to be more likely to stay in favor, and unseating them takes real change.
This change can also only really be measured in the polls though, in the performance of stocks, and AMD getting so many votes last year, winning the whole election by a landslide, needs to be understood as a good thing. So far this year, they are still getting a lot more votes than almost all other stocks, and understanding that stocks are really like elections can serve to propel our understanding to the point where we finally start to get it. This is a nice place to be considering our financial welfare is the bill that gets voted on.