During the California gold rush, many miners went bankrupt. However many merchants who were selling picks and shovels became rich.
Most investors recognize that the gold rush is on in 5G and artificial intelligence. The gold rush is also on in automotive electronics. Just take a look at a massive move in Tesla’s TSLA stock. (See this comparison of Tesla and other tech stocks and this analysis of Tesla’s share-price movement.)
If you could buy only one stock to take advantage of all of these trends without worrying about who would succeed, what would it be? Let’s explore with the help of a chart.
The chart
Please click here for an annotated chart of Applied Materials Inc.’s AMAT stock.
Note the following:
• 5G and artificial intelligence are huge users of semiconductors.
• In addition to the gold rushes stated above, there are more gold rushes in IoT (Internet of Things), consumer devices, renewable energy, power management and data centers.
• The picks and shovels for the present-day gold rushes are semiconductors.
• Picks and shovels were easy to make; semiconductors are increasingly becoming more complex.
• Applied Materials is a vendor of equipment used in semiconductor manufacturing.
• Applied Materials is a second derivative, and semiconductors are the first derivative of the gold rushes.
• There is an advantage to a large second-derivative semiconductor company such as Applied Materials. For example, Intel INTC was big in data centers and Advanced Micro AMD wasn’t much of a factor. When AMD stepped up with new designs, it started eating Intel’s lunch.
Another example is Nividia NVDA, which has reported excellent earnings. In our analysis at The Arora Report, Nvidia has a one-year lead in many facets over its competitors. However, prudent investors should be concerned not only about potential rewards but also potential risks. How long will Nvidia be able to maintain its lead? Take a look at Nvidia’s chart and you will see it has gone parabolic.
Start your analysis with Arora’s Second Law of Investing and Trading: Nobody knows with certainty what is going to happen next in the markets. In your risk analysis, ask yourself the following question, “How would the chart look if Nvidia started losing its lead?” You could easily lose 50% to 80% of your money.
In contrast to the examples given above, Applied Materials has relatively low risks in the long term.
• The chart shows a nicely upward sloping trend line. This is a positive.
• The chart shows a new trend line with a higher slope that started forming last year. This is a positive.
• The chart shows that the recent pullback was shallow. This is a positive.
• The chart shows that during the pullback, the accelerating trend line held. This is a positive.
• The chart shows that Applied Materials reported good earnings….Read more at MarketWatch.
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