It’s Time for a Contrarian Play In Advanced Micro Devices

Managing one’s emotions is a core component of long-term success in the financial markets. Greed is among the most destructive emotions, and it’s awfully difficult to moderate one’s greed when Advanced Micro Devices (NASDAQ: AMD ) shares have been a consistent — or should I say relentless — rainmaker this year.

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We’re not just talking about doubling your money, either: from around $18 in January to $46 as I’m writing this, dip-buyers have been sorely disappointed at 2019’s lack of short-term opportunities in AMD. There’s still (as always) the potential for further upside on the horizon, so short-selling AMD would be a fool’s game.

Still, I’m advising extreme caution as analysts and shareholders test the limits of the old saying, “Trees don’t grow to Heaven.”

Extreme Sentiment on AMD

Call me crazy, but I like to use investor and analyst sentiment as a contrarian indicator sometimes. It’s not difficult to gauge the current sentiment on Advanced Micro Devices shares at the moment. In fact, just take a glance at the AMD price chart and you’ll detect a slope that has gone from steep to nearly vertical.

If valuation is a valid sentiment marker, then the needle is pushing hard into the green here as well. As InvestorPlace.com contributor Thomas Niel points out, AMD’s valuation is rather “frothy” with the stock trading at 68.2 times earnings as measured in 2019.

As I see it, AMD investors have fully priced in Phase 1, Phase 2 and all future phases of a U.S.-China trade-war resolution. This is an assumption that shouldn’t be made, but the hunt for yield may have clouded the market’s judgment in this instance.

Not only are investors pricing in good news before it actually happens, but analysts are jumping on the bandwagon as well. Among the analysts who have upgraded their ratings and/or target prices are Wedbush Securities’ Matt Bryson and Wells Fargo’s Aaron Rakers. As I’ve opined on many occasions, analysts are lagging indicators who chase 52-week highs like dogs after a mail truck.

A Return to Sanity

Yet another upgrade comes from RBC Capital’s Mitch Steves, who maintained his outperform rating for AMD while raising his price target from $50 to $53. Steves also predicts that Advanced Micro Devices’ earnings per share will come to $1.30 in 2020 and (if you can believe it) $1.74 per share in 2021.

Along with this massively ambitious forecast, Steves represented his firm with the statement, “Net net: we attempt to be ‘ahead of the curve’ and believe estimate raises for semiconductors broadly (and AMD) will begin in Q1.” This, in my view, begs the question of whether a substantial price-forecast escalation ought to count as being “ahead of the curve.”

You’re certainly welcome to disagree, but I just don’t see it that way. Steves has every right to try to make a name for himself (I dare not cast stones regarding this), but let’s apply some logic — and some basic math — to what this particular analyst is proposing. Specifically, he suggests an earnings-per-share increase of 33.84% from 2020 to 2021.

Given the share-price increase in 2019, I feel that Steves’ earning-per-share increases would be needed to justify the current stock price, not the share-price gains that he’s proposing. Not to start a war of words, but Steves and his analyst-community ilk appear to be leapfrogging each other in a grotesque estimate-escalation battle. They’re mirroring the stock’s actual price movements, sure, but it’s a fun-house mirror and the last thing this market needs now is more distortions.

The Takeaway on AMD

If Steves’ self-congratulatory “ahead of the curve” proclamation set me off, don’t get the wrong message: AMD can still power ahead and I’m sure the pundits will raise their targets, once again, if it does. As long as we view the target-raising as what it is — reactive, not predictive — then you and I, at least, can keep our feet on the ground and our heads out of the clouds.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.