Get Out Now

I follow cannabis stocks closely, as I run 420 Investor, a subscription service for people who want my insight on the sector that I have been following since early 2013. I don't trade cannabis stocks personally due to some input that I received from the CFA Institute. I am a Chartered Financial Analyst, and I don't want to break their rules and possibly lose that designation!

I trade non-cannabis stocks rather extensively. I run two IRA accounts, and I also have a trading account. I am very negative on stocks in general right now, but my biggest exposure currently is betting against two stocks that have benefitted from investor interest in artificial intelligence (AI). These stocks are Nvidia (NVDA) and Super Micro (SMCI). They are both up a ton year-to-date and longer. Just in 2024, as of last night they were up 72% and 278%, respectively:

I have nothing against artificial intelligence at all. I think, though, that investors are getting carried away with the stocks that could benefit from further advancement. I added NVDA to my watchlist first, and, more recently, SMCI. When I was an analyst and portfolio manager from 2000-2006 at Piedra Capital, I followed both of these companies. I liked NVDA! Here is how those two stocks look so far in this century:

Yowsa! Now, just because something goes up a lot is not a reason in and of itself to bet that it won't keep going up. In this case, though, they both seem very overvalued.

NVDA has a market cap of $2.1 trillion, making it one of the largest American stocks in size. It is 4.6% of the NASDAQ 100 (QQQ), the fourth largest right behind Amazon (AMZN). The stock closed at $852.37 yesterday, and it is up 1.5% ahead of the market open today. The stock trades with a PE of 35X looking at the estimate from analysts for 1/2025. The enterprise value (equity + debt - cash) is $2.11 trillion, and it is 29.6X the projected EBITDA for the next fiscal year. The stock trades at 18X book value and about 19X tangible book value. I think the CEO is an intelligent, ethical person.

SMCI is a lot dicier! Before I share its numbers, I want to say that it isn't as leveraged to AI. Also, I am not impressed with the CEO. Neither was the SEC! In 2020, it settled with the SEC and lost its CFO, paying a $17.5 million penalty. The stock at last night's close of $1074.34 (now $1075 ahead of the open) had a market cap of $60 billion. The 6/2024 PE is about 49X, and the enterprise value to projected EBITDA for 6/2024 is about 35X. It trades at about 19X book value and tangible book value.

SMCI posted an all-time high yesterday on news that it is joining the S&P 500 on March 18th. Yesterday, news hit that a director sold stock ahead of this announcement that drove the stock up 17.4% yesterday on this past Thursday in the 870s. Not to worry about him, though, as he has 22K shares still worth more than $23 million. Note that the company raised $1.5 billion last month selling convertible notes. They had a zero percent interest-rate, and they are convertible into stock at $1951.04. No bankruptcy here! That was a great financing, and the notes aren't due until 2029.

I think that the few stocks that are "working" like these attract a lot of attention because so much is not working. Those that are bullish on the stocks like the PE ratios because they are so much below the current growth rates. NVDA FY25 revenue growth is expected by analysts to increase 80%, and its EPS are forecast to grow 89%. The PE to earnings growth (PEG ratio) is very low at just 0.4X. SMCI is projected in FY25 to grow revenue 37% and EPS 33%. That PE ratio is low too!

A lot can go wrong, though perhaps these stocks will retain their nose-bleed levels. I am sharing my thoughts here rather than Seeking Alpha because I am sticking to just cannabis there. I am short both of these stocks, as I disclosed above. I don't think that I can influence the stock at all with my expressing my negativity.