Investors shouldn’t wait for “ironclad proof” that business is improving at Micron, Nvidia and Lam Research before they buy the semiconductor companies’ stocks, CNBC’s Jim Cramer said Wednesday as stocks inched higher.
“If you wait for ironclad proof that a troubled business has turned itself around, you’ll miss most of the upside from that turn,” he said on “Mad Money” after all three chip stocks surged. “The next time stocks drop, I need you to think about this group. It’s bottomed, and the rally? It’s just beginning.”
In Wednesday’s session, Micron climbed 5.04 percent, Nvidia rose 1.97 percent and Lam Research gained 5.16 percent. While the semiconductor industry has been under pressure in recent months due to supply-demand imbalances, the rallies encouraged Cramer that the worst could soon be over.
“You can’t wait for an all-clear sign. When you think a troubled business is ready to turn around, you need to buy its stock before the bad news comes to an end,” he said. “The semis led us down last quarter, and now, I think they have the ability to lead us higher this quarter, although a lot of people might find that hard to believe.”
Still, Cramer preached caution for investors looking to make near-term profits: all three companies could still report at least one more disappointing quarter, even as they’ll likely enjoy a stronger second half of 2019, he said.
Wall Street seems to agree. On Monday, BMO Capital Markets analysts upgraded Micron on expectations that business will improve and predicted a 50 percent rebound in the stock this year, but stated that “fundamentals will likely get worse before they get better.” Bernstein followed suit with a slightly less bullish upgrade.
“These analysts … are absolutely right,” Cramer said, pointing out that Micron’s stock is the cheapest in the S&P 500 with its 4.4 times price-to-earnings multiple. “You can’t wait for the price of [dynamic random-access memory chips] — that’s Micron’s main product — to bottom. You have to get in ahead of the bottom.”
The same goes for Nvidia, which struggled to manage an inventory glut in 2018 as some of its chips that were used for cryptocurrency mining saw lower demand, Cramer said.
“I like Nvidia here: the company just cut prices for its new Turing line of chips, one reason I believe their adoption will be far more rapid than Wall Street expects,” he argued. “Plus, Nvidia never lost its hold on autonomous driving, machine learning [or the] data center — the strength in those areas has just been obscured by the crypto collapse.”
Shares of Lam Research also tend to bottom “well before” management flags customer weakness to its stakeholders, Cramer said, adding that the equipment maker’s stock climb is “all about anticipation.”
The chip stocks’ rally also speaks to the broader market layout, the “Mad Money” host said. The Federal Reserve’s interest rate hikes may have cooled the economy sufficiently, but not so drastically that stocks don’t have room to rally, he said.
“This rally is about a turn in the second half,” he said. “If you believe the trade war will simmer down, if you believe Fed Chief Jay Powell will hold off on raising interest rates — that he’ll make decisions based on the actual data like he told us last week — then the worldwide economic expansion can restart, and basic building blocks like Micron’s chips can make a comeback in pricing.”