Last month, Schaeffer’s subscribers Event dealers service has just made a 201% gain in just under a month with semiconductor trunk Advanced Micro Devices Inc (NASDAQ: AMD) June 18, 2021 72.50 strike call. Below, Schaeffer’s Senior Market Strategist Chris Prybal visited the Market Mashup podcast to unpack the trade, explain why we were bullish on Chip stock, and provide some insight into how he’s looking for big winners. Below is an excerpt from the episode.
Patrick: You placed the call from June 72.50 on Monday, May 17th. Which drivers did you see ahead of the trade?
Chris: By and large, and from a global perspective, the trade war with China has compounded the fact that we source most of our chips and that overseas processing is done in Taiwan. The US doesn’t make a lot of chips here anymore. Everything you buy from a video game to a children’s toy to a car has multiple chips. I read an article where a truck these days has 1,400 separate chips just to produce a vehicle.
Our economy is tied to the semiconductor industry. And since the trade war with China, it has become clear that America has to manufacture and produce chips in its own country so that our supply chains are always equipped. And we are not dependent on foreign power or an adversary who could take away our manufacturing capabilities and then all but wipe out our supply chain.
M&A activity in this area has increased over the past year. The numbers I saw last year were as high as $ 118 billion from M&A activity alone, many of those types of combinations are still in court. They are awaiting approval, but all intentions point to the three in question. And Nvidia (NVDA) is buying ARM. So it’s an American company that is buying a European company. You included Analog Devices (ADI) with your Maxim purchase. Both are American companies. And then AMD was in the process of buying Xilinx when I made that trade. There is much to be done for protectionism. And for production purposes, we have to do these things in-house.
When the merger was announced, the total value of the company was set at $ 135 billion. Now it took nine to twelve months for the permits to go through. There is always a downturn in these mergers and acquisitions when stocks don’t go up. They lose the market because they are consolidating, because there is uncertainty about mergers, they could be postponed, that could be delayed, they could be eliminated entirely for security reasons. There is a lot of hesitation among investors as to whether or not to get in, but I went ahead and stepped in because at the time of the first trade here the market value of AMD and Xilinx, when you add the two together, is well below that $ 135 billion Dollar had fallen, and it fell to $ 120 billion, as shown in the graph below.
You can see that around $ 117 billion appeared to be a floor. And I thought, “$ 121.117, they’re pretty close,” knowing the total value on the day of the announcement was $ 135. But I gave it a try from a valuation point of view and put our subscribers on the market knowing I only had a gut feeling that it would pass because of security concerns and America needs to consolidate these industries for strength and power.
I thought it would be of value to our subscribers. Then the sentiment factor was pretty cheap, you have pretty low implied volatility (IV) which is a crucial component for any option buyer. There were 14 hold ratings and one sell rating, a strong sell rating of an upward stock; AMD has grown nearly 1,000% over a 10 year period. And it was down to 750% by that point.
Its market value at the time was $ 90 billion. So you had a good analysis of expectations that we have here at Schaeffer and that combined the fundamental technical and sentiment analysis in one package. I was very lucky that AMD came out two days after starting this trade and said they were going to launch a $ 4 billion share buyback program that was dividing $ 4 billion by 95% of the value of the shares outstanding they had would buy back, and that began to drive stocks up in earnest, allowing our subscribers to make some profit that day.
Patrick: You also mentioned that the short-term interest has doubled since the merger, I think, was that something you also saw as a possible driver?
Chris: You will sometimes find that there is a trade in arbitrage in M&A activity. That being said, we have other indicators that analyze whether or not the arbitrage in this particular indicator was still quite high, suggesting that there was a large daily short interest and shorts that may have specialized in the merger and didn’t work. However, once they got European Union (EU) approval, the stock soared because there is less uncertainty that will ultimately materialize.
There is a lot of connective tissue between yours GameStop (GME) trading and this with the monitoring of macro headlines, EU permits and sales in the same store with the GameStop. You balance a lot of the technical analysis we do at Schaefer with the macro headlines. Is that a matter of course for you? Why do you attract this type of research?
The price is what you pay for, but the value is what you get. Many times stories where the media are overlooked because of their clicks, eyeballs and what is popular. But as you delve into the details, you will discover and uncover things that other people have overlooked. And they may or may not pay off for you right away. But repeatedly uncovering these truths about a stock or sector really makes you feel like you’ve discovered things before others. And then you see the public come in and start buying up what you have. It of course allows you to sell more easily; You are not a forced seller, there are plenty of people to sell to because you used to be in this business.
Patrick: Are you still watching the chip sector? What’s next for a stock like AMD?
Chris: Well the buyback was well received, I think that was a sign from management. The company is financially secure and they have made it clear that they believe this merger will complete by the end of the year. AMD, of course, rose to 200%. But then it solidified for a while. And it pulled back to short-term moving averages. The mood really hasn’t changed, with Wall Street still worried about whether China will approve this deal.
And then will the United States ultimately approve the deal? I think once you see these two bodies approve it, it will show the full value of this merger. And I think you will be richly rewarded if you take your time because there is the restriction of the trade war. And that’s the beauty of options, it’s in your terms; You set your entry costs. And then consider the time component and how it controls your capital’s risk.
Bernie Schaeffer’s subscribers Chart of the week received this comment on Sunday July 18th.