Part 6

Advanced Micro Devices, Inc. (AMD)

Company Background

Advanced Micro Devices, Inc. (AMD) is an American multinational semiconductor company based in Santa Clara, California, that develops computer processors and related technologies for business and consumer markets. While it initially manufactured its own processors, the company later outsourced its manufacturing, a practice known as going fabless, after GlobalFoundries was spun off in 2009. AMD’s main products include microprocessors, motherboard chipsets, embedded processors and graphics processors for servers, workstations, personal computers and embedded system applications.

Current position – Financial Performance & Future Growth prospects

Advanced Micro Devices has definitely evolved from a pure consumer-PC chip provider into an enterprise-focus company in recent years, which has in turn strengthened its position in the semiconductor market. AMD has also managed to emerge as a strong challenger to NVIDIA’s dominance in the graphic processing unit or GPU market with its Radeon technology.

AMD’s Q3 and Q4 results benefited from solid uptake of Ryzen and EPYC server processors, courtesy of increasing proliferation of AI and Machine Learning (ML) in industries like cloud gaming and supercomputing domain. Growing clout of AMD’s products in the data center vertical, driven by work-from-home and online learning trends, remains a key catalyst. Also, partnerships with Amazon, Microsoft, Baidu and JD.com are opening newer business avenues.

Launch of 7 nanometer (nm)-based AMD Radeon RX 5700-series gaming graphics card family featuring RDNA architecture, high-speed GDDR6 (Graphics Double Data Rate type 6) memory and support for the PCIe 4.0 interface, has helped the company increase presence among gamers.

Further, AMD Radeon Instinct family of GPU products are gaining traction in data center applications, including deep learning training and traditional high-performance computing (HPC) workloads.

Additionally, AMD EPYC 7001 Series of high-performance processors is helping AMD gain share in the server market. Further, AMD EPYC Embedded 3000 Series of processors addresses new markets including, networking, storage and edge computing devices.

One of the most interesting and important developments for AMD was the recent announcement that it has entered into a definitive agreement to acquire Xilinx for $35 billion in an all-stock transaction. The buyout will significantly help in expanding AMD’s data center business.

In consumer-PC market, AMD has become a key challenger to Intel courtesy AMD Ryzen desktop processor family. The company’s desktop-based processor offerings include Ryzen and high-end Ryzen Threadripper processors, among others. AMD Athlon and AMD PRO series of processors cater to commercial and consumer desktop PC market.

AMD’s processors are primarily powered by the company’s proprietary “Zen” CPU and “Vega” GPU architectures. Santa Clara, CA-based, AMD generated full year revenue for2020 of $9.76B up 45%; quarterly and full year net income more than doubled from prior year . The company reports operations under two segments — Computing and Graphics, and Enterprise, Embedded and Semi-Custom.

Computing and Graphics segment includes desktop and notebook processors and chipsets, discrete GPUs and professional graphics. This segment’s revenue in Q4 2020 was $1.96 billion, up 18 percent year-over-year and quarter-over-quarter primarily driven by strong sales of Ryzen™ processors.

Enterprise, Embedded and Semi-Custom segment includes server and embedded processors, dense servers, semi-custom SoC products, engineering services and royalties. This segment’s revenue for Q4 of 2020 was $1.28 billion, up 176 percent year-over-year and 13 percent quarter-over-quarter driven by higher semi-custom and EPYC™ processor sales.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that occurred in the March, 2020-January, 2021 period month. It took the price from the March 18th, 2020 lows of $37 to the $98 all-time highs in the middle of January, 2021. This represented an astonishing 165% gain for the stock in less than a year. However, the road to the above mentioned all-time highs was filled with many different hurdles as the bulls had to overcome quite a lot of obstacles in order to keep pushing the price higher. There were couple huge 20% corrective movements that took place during this strong uptrend, and also many smaller 3-5% declines but the uptrend remained intact on all occasions.

We will start buying AMD at $80, just above the major support where lots of buying pressure is expected. In case the price breaks the support and drops further, we will be interested in adding more to our buy positions at the next strong support at $75. Our first take profit target is at $105, followed by the next target at $120 where we will be fully closing our positions and collecting the profits.

The stock has continued to attract a lot of investors’ attention as it remains one of the world’s leaders in the semiconductor space and now the data center business. The fierce rivalry between AMD and NVIDIA has continued to help both companies to innovate and develop their chips further. Throughout the last few years and with some of the major recent acquisitions AMD has also entered into the data center market, which in turn is expected to see a remarkable double-digit CAGR in the next 3-5 years. The way that AMD and NVIDIA have occupied the graphic processing unit (GPU) market has turned their stocks into go-to choices for both small retail and large institutional investors looking to add some tech and semiconductor exposure to their portfolios.

The stock is currently sitting at $81 per share, which is 17.3% below its all-time highs of $98 per share. It seems that the stock has finally found some meaningful support around the $74 level, after the massive almost 25% decline that the stock staged in the last 4-6 weeks. The most recent failure of the price to break below the $74 mark could be taken as a signal for a fading bearish momentum signaling for a potential bullish reversal ahead and a general resumption of the long-term uptrend.

A more meaningful correction for the stock was anticipated by us as we clearly pointed to the heavily overextended nature of the uptrend in our last coverage of the stock back in November, 2020. We warned all of our followers that a move lower towards the $75 level is coming up ahead and that they need to wait for the retracement to take place before buying the stock. Our analysis was once again accurate as even though that it took a little bit longer for the correction to take place, it did materialize in the beginning of March.

However, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of the big tech names as well as other favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLC and the XLK will be two of the best performing sectors in March. While we believe that the stock market in the US is currently holding a lot of intrinsic risks – COVID-19, the newly formed office in DC, the economic recovery, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, we see that the winners would most likely continue to win. We are strongly bullish on AMD in both the short and long term and believe that the most recent price corrections must be treated as a great opportunity to buy this strong performing stock at a remarkable discount, which would in turn give us a chance to maximize our profits to the upside.

Moreover, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already retraced from their overbought conditions and are signaling that the uptrend might be returning pretty soon. In addition to that, it is important to note the SPY ETF is heavily dominated by the Technology sector and the XLK as a whole would continue to attract a lot of the investors’ attention moving forward, which in turn would push the SPY ETF higher as well. We must always remember that technology is everything nowadays and the companies in this space are the ones shaping up our future. This makes us optimistic for the future performance of AMD as a meaningful part of the ETFs structure. Our analysis shows that as a result of the great leadership performance by the senior management of the company and the phenomenal fundamental positioning of AMD, the stock will be able to hold its ground better than some of the other stocks out there in the event of an even deeper correction, and it would also significantly outperform the broader market once the uptrend resumes.

Acknowledging the fact that we are in a position to buy at an over 15% discount from the all-time high levels, we would like to point out that buying at these levels would be suitable for both risk-oriented investors as well as risk-averse traders. Thus, we are advising all of our followers to look at the 75-80 range for a potential long entry on the stock.

Caterpillar Inc. (CAT)

Company Background

Caterpillar Inc. (often shortened to CAT) is an American Fortune 100 corporation which designs, develops, engineers, manufactures, markets, and sells machinery, engines, financial products, and insurance to customers via a worldwide dealer network. The company is known for its iconic yellow machines and that its the largest global manufacturer of construction and mining equipment. Given that it serves a gamut of sectors – infrastructure, construction, mining, oil & gas and transportation, the company is considered a bellwether of the global economy. In 2018, Caterpillar was ranked #65 on the Fortune 500 list and #238 on the Global Fortune 500 list. Caterpillar’s stock is a component of the Dow Jones Industrial Average.

Since 1925, Caterpillar’s product portfolio has evolved and currently boasts over 20 brands. It has more than 4 million of products with an extensive dealership network of 165 dealers spanning across 191 countries. Caterpillar started using telematics in the 1990’s and reached its target of 1 million connected assets in 2019. The combination of innovation, cutting-edge technology, coupled with the formidable reputation, sets Caterpillar apart from its peers.

Current position – Financial Performance & Future Growth Prospects

As a purely cyclical company dependent on a strong global economic output, Caterpillar has felt the negative impact of the COVID-19 pandemic probably more than anyone else. Due to the lengthy economic recovery that we see ahead, Caterpillar’s business is expected to recover quite late in the cycle. The kind of outlays necessary for buying its construction, mining, infrastructure, oil and gas, and industrial machinery are, after all, usually made when customers are feeling comfortable with their end markets.

Furthermore, Caterpillar sells much of its equipment through independent dealers. They tend to simply curtail buying from the company during slowdowns, preferring to deplete their inventories.

With its current market capitalization of $124.87 billion Caterpillar is the 63rd-largest company in the S&P 500 Index and the 44th position in Fortune’s “World’s most admired companies” and 8th in the Dow Jones Industrial Average, with 4.4% weight of the index.

The key for the company moving forward lies in its ability to adapt to the current economic environment and avoid manufacturing products that are in low demand at the moment due to COVID-19. Caterpillar continues to monitor end-user demand, commercial shipments, dealer inventory, orders and backlog and plans to adjust production levels accordingly. This will position the company well in 2021. It has been successful in reducing lead times, which enable both the company and dealers to adapt quickly to changing market conditions.

The current accommodative monetary policy in North America with interest rates near 0% have led to an improved homebuilder confidence and growth in housing starts, which in turn will support the demand for Caterpillar’s construction equipment. In China, the outlook for the construction sector holds promise backed by government spending on infrastructure and building activity.

Despite its heavy cyclical exposure the company has managed to maintain a very stable financial position throughout this pandemic so far. Caterpillar’s cash and liquidity position remains strong with the company ending third-quarter 2020 with cash and short-term investments of $9.3 billion and available liquidity sources of more than $14 billion. ME&T debt at the end of the third quarter 2020 stood at $11.1 billion. Caterpillar’s current ratio is at 1.54. The company’s times interest earned ratio is currently at 4.9. These figures indicate that the company is in a good position to meet its debt obligations.

In its most recent report, Caterpillar reported Q4 2020 adjusted earnings per share of $2.12, which beat the street’s estimate of $1.45 by a margin of 47%. However, the bottom line declined 22% from the prior-year quarter’s adjusted earnings per share of $2.71 as sales fell across all segments and geographies due to weak demand.

The company’s Q4 2020 revenues of $11.24 billion surpassed the street’s estimates of $11.16 billion. However, the top line declined 15% from the year-ago quarter on lower sales volume. This was primarily due to low end-user demand amid the coronavirus pandemic and the impact of changes in dealer inventories.

Furthermore, it is clear that the senior management of the company understands the current market forces and influential trends out there as Caterpillar has continued to focus on customers and on the future by continuing to invest in digital capabilities, connecting assets and job sites along with developing the next generation of more productive and efficient products. The company plans to fund initiatives that drive long-term profitable growth focused on areas of expanded offerings and services and digital initiatives like e-commerce.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 12 months has taken the price from the March 23rd lows of 2020 around $85 to the $229 all-time highs in the beginning of March, 2021. This represents an astonishing 169% gain for the stock in less than a year. However, the road to the current all-time highs was filled with many different hurdles along the way as the bulls had to overcome quite a lot of obstacles in order to keep pushing the prices higher. Throughout the last 12 months we have seen 6 larger corrective movements of anywhere between 10-15%, but the uptrend has remained intact. The fact that the economy is slowly reopening and recovering makes the uptrend looking much healthier now than it was 10 months ago. At any rate, CAT’s stock as well as the whole XLI ETF have continued to break high after high and to outperform the broader market. As we have already mentioned in our ETF Correlation Analysis for March the leaders in this ETF, Honeywell International, Boeing, Caterpillar, 3M Company, Deere & Company etc. have been among the major beneficiaries of the cyclical rotation from growth into value stocks that the market has been going under.

We will start buying CAT at $220, just around the major support where lots of buying pressure is expected. In case the price breaks the support and drops further, we will be interested in adding more to our buy positions at the next strong support at $208. Our first take profit target is at $260, followed by the next target at $275 where we will be fully closing our positions and collecting the profits.

The stock is currently sitting at $229 and is pushing further into uncharted territory. After breaking above the strong horizontal, psychological and all-time high resistance at $225, in the first half of March, CAT has managed to find a lot of buying interest and it looks like the strong bullish momentum is here to stay as the cyclical rotation will most likely continue in the coming weeks. This most recent price break could be taken as a signal for a potential trend continuation move all the way up towards the round number of $250. The $225 level has already started acting as a strong support and is expected to limit any future price declines. However, a more meaningful correction should not be completely discarded as a potential scenario as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 12 months it will be more than normal to see such downward corrective movement. However, we believe that the new $1.9 trillion stimulus package passed in the US, will inject a lot of liquidity into the market. We expect most of the big tech names and retail trading favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the SPY and the XLI will definitely perform well in March. In addition to that, following the Gamestop phenomenon retail traders have found that picking the right stocks could be extremely profitable and are now much more willing to look at other sectors apart from Technology. Furthermore, lets not forget that the two ETFs share an extremely strong 91% 10-year positive correlation and if one of the indices breaks its previous all-time highs there is a 91% chance of the other ETF to follow suit, statistically speaking.

While we believe that the stock market in the US is currently holding a lot of intrinsic risks – COVID-19, the newly formed office in DC, the economic recovery, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, we see that the winners would most likely continue to win. We remain cautiously bullish on the CAT in the short term and believe that any price corrections should be treated as great opportunities to buy this strong performing industrial stock at a good discount, which would in turn give us a chance to maximize our profits to the upside. However, we need to point out that some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are getting close to overbought territory, which might be taken as a short-term positive, by confirming the strong bullish momentum, but it should definitely be looked at with caution from a mid to long-term perspective as it might indicate that a potential correction lies ahead. The most recent technical break of the prior ATH levels on the price chart has been strongly supported by the daily RSI, as it has continued to push higher, thus moving in a solid uptrend. Furthermore, XLI is trading above its 50 DMA and 100 DMA, which is also clearly showing that the strong uptrend remains in place. As long as CAT is trading above $225, we see the stock moving higher. A potential downward break of the above-mentioned support will most likely send the price lower towards the strong psychological and horizontal support at the $200 mark.

Acknowledging the fact that we are once again sitting at all-time high levels in a time filled with plenty of uncertainty and high volatility, we would like to point out that buying at these levels would be more suitable for risk-oriented investors, while risk-averse traders should wait for a minor 5-7% correction before jumping back in on the long side. Thus, we are advising our risk-oriented followers to go ahead and start buying the stock as being one of the companies with the highest percentage weight in the XLI ETF right now, we believe that the stock will continue to do well in the coming weeks.

Sincerely,

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