Nvidia beats it, but I’m still looking elsewhere

Hello, reader.

Although I know it sounds hard to believe, there was a time when Nvidia Corp. (NVDA) it wasn’t one of the hottest stocks on Wall Street. When the company went public on January 22, 1999, it opened at $12 and then traded as low as $0.03 in May 1999.

Still, in the 24 years since its IPO, Nvidia has grown remarkably in popularity and its stock price along with it. In fact, CNBC’s Jim Cramer even named his dog “Nvidia” in 2017.

The hype surrounding Nvidia turned into such a frenzy that even its second quarter earnings report was considered a must-watch event. A group of investors in New York held an earnings “watch party” for Wednesday night. Somehow, Nvidia’s earnings turned into Wall Street’s Super Bowl, or its version of the Oscars.

So how did Nvidia do?

The chip company’s second-quarter revenue rose 122% year over year to a record $30.0 billion, beating estimates of $25.64 billion. Data center revenue also set a new record, rising 154% year over year to $26.3 billion.

Second-quarter earnings rose 152% year-over-year to $16.95 billion, or $0.68 per share, compared with $6.74 billion, or $0.27 per share, in the second quarter quarter of 2024. The consensus estimate was for earnings of $0.64 per share, so Nvidia posted an earnings surprise of 6.3%.

However, while Nvidia beat expectations, investors were clearly looking for an even bigger earnings beat. That. As a result, the stock retreated today.

The “unstoppable” stock is now facing “endless” scrutiny and questions are being raised about the sustainability of its meteoric rise.

This is why, while I wouldn’t bet against the chip king…I don’t play into the hype either. Companies as dominant as Nvidia often earn high ratings and can maintain those ratings for what seems like forever.

That said, Nvidia will need to continually achieve near-miraculous results to validate and/or expand its valuation.

Instead, I prefer to look at where the partygoers are I’m not watching.

So, in today’s Smart moneyI’d like to offer some real-world examples and personal experiences that challenge most beliefs about highly valued stocks and their overlooked counterparts.

Then I’ll share with you where you can find some of these unexpected winners…

Application of Popular Opinion

Let’s go back to 2007, when the myopia of Wall Street analysts and the financial press produced a case of bullish blindness and blind bear on two companies.

Analysts praised one company while disparaging another. Let’s call them Company A and Company B.

In July 2006, Standard & Poor’s affirmed the financial strength of Company A as ‘AA+’. In explaining this investment grade rating, S&P wrote…

The ratings are based on the group’s extremely strong and well-diversified global competitive position, consistent track record of strong operational performance… and strong organic capital growth.

In June 2007, credit rating firm AM Best affirmed Company A’s superior financial strength rating of A++. It cited the company’s “consistent earnings performance, solid risk-adjusted capitalization, strong liquidity position and diverse product portfolio.”

In the 15 months that followed, Company A’s stock fell 95% and experienced a near-death experience.

That was it American International Group Inc. (AIG)which would have failed completely in 2008 had it not been for a $182 billion bailout from the US government.

Meanwhile, while many investors were cheering for AIG in mid-2007, almost no one on Wall Street or in the financial press had anything good to say about Company B. In June 2007, for example, only seven analysts rated the stock at “Buy,” while 12 rated it “Sell” or “Hold.”

A New York Post the story of July 27, 2007, captured the spirit of the moment…

(Company B) has been besieged by bad news for the past few days… Making matters worse, (Company B)’s challenges don’t seem to be going away anytime soon.

Despite this bleak forecast, Company B’s stock will rise more than 1,300% over the next four years, even though the stock market averages fell during the financial crisis of 2007-2009.

Company B was Netflix Inc. (NFLX).

Interestingly, the main challenges faced by Netflix, according to him New York Post story, there was “fierce competition from rival Blockbuster”—a company that would barely exist four years later.

Opposition can lead to opportunity

As these examples illustrate, popular opinion is more often your portfolio’s enemy than its friend.

Many of the most successful investment recommendations of my career have come from the ranks of stock market “dollards” and “misfits.” These were disclosures that most investors avoided or ignored. It was the “loser” stocks that popular opinion despised.

By contrast, many of the most successful short selling recommendations of my career have been among the darlings of the stock market. Actions that could do no harm, according to popular opinion.

Let me give you some examples…

1. In early December 2000, I recommended buying Humana Inc. (HUM) and shorting now inactive Williams Communications Group Inc. (WCG). at that moment, zero analysts rated Humana a “Buy” while 12 analysts rated “Sell” or “Hold”. Conversely, four analysts rated Williams a “Buy” while only one rated it a “Sell” or “Hold”.

   Less than two years later, Williams filed for bankruptcy, while Humana had made a modest profit. In three years, Humana advanced 80%, even as the S&P 500 was losing. And over a seven-year period, Humana grew by more than 500%.

2. In March 2001, I recommended buying AngloGold Ashanti plc (AU) and short selling Providian Financial Corp. (PVN). At that time, only three analysts rated AU a “Buy,” while six rated it a “Sell” or a “Hold.” In contrast, 17 analysts rated PVN as a “Buy” while only four rated it a “Sell” or “Hold”.

   A year later, PVN has exploded over 90% while AU is up over 50%.

Now, I’m not saying that Nvidia will deteriorate like Williams and Providian did. But the likelihood of marginal gains, or even losses, from this point is greater than the likelihood of significant double-digit gains.

Moving from these past examples to the present moment, I recommend some actions that popular opinion ignores in me Fry’s Investment Report portfolio.

One such company is in the healthcare sector…and only two analysts view it favorably. The other five that follow the stock rate it “Sell” or “Hold.” However, the company is currently up nearly 30% since I recommended it in February.

To gain better insight into my recommendations and to stay ahead of emerging global macroeconomic trends in various industries, click here to find out how to join me at Fry’s Investment Report.

Obviously, I can never guarantee that the contrarian recommendations will be as successful as I expect them to be. But we’ve learned from long experience that challenging popular opinion often leads to investment opportunities, opening the door to spotting trends that are early in their development—before they’ve impacted stock prices in a significant way.

Sincerely,

Eric Fry