We recently compiled a list of Jim Cramer’s 10 Stock Picks You Shouldn’t Miss. In this article, we are going to take a look at where NVIDIA Corporation (NASDAQ:NVDA) stands against Jim Cramer’s other top stock picks.
Jim Cramer reacted to Monday’s market by questioning if there’s any money left to invest and why mutual funds aren’t holding enough cash. The S&P 500 fell 17.77 points, or 0.3%, to 5,616.84. The Dow Jones Industrial Average rose 65.44 points, or 0.2% to 41,240.52. The Nasdaq composite fell 152.03 points, or 0.9%, to 17,725.76.
“What do we do if we’re out of money? Don’t mutual funds have enough cash? That’s my reaction to today’s market action. Right now, mutual funds know they have to pivot out of consistent growth stocks, especially tech stocks like software and semiconductors, which don’t benefit from rate cuts. They need to swap into companies that can supercharge their earnings as the Fed lowers rates. We all recognize that cyclical stocks, the ones that benefit from lower rates, can go higher, maybe much higher.”
Cramer pointed out that mutual funds now need to shift away from consistent growth stocks, particularly in tech sectors like software and semiconductors, which don’t benefit from interest rate cuts. Instead, they should move towards companies that can boost their earnings as the Federal Reserve reduces rates.
“What’s painful for many of you are the declines in stocks of companies with consistent earnings. These companies, especially tech firms, don’t really need lower rates, and they’re selling off as money managers raise capital to rotate into the rate-cut winners.
So, why don’t we go over the winners and talk about the losers? The rate-cut winners are divided into two camps: stocks with high dividend yields and cyclical companies with earnings that should go higher because lower rates will bolster various industries, especially housing.”
Cramer explained that cyclical stocks, which tend to perform better with lower rates, are likely to rise, possibly significantly. However, the decline in stocks of companies with stable earnings, especially in tech, is troubling for many investors. These stocks are being sold off as money managers raise capital to invest in those poised to benefit from rate cuts.
Cramer emphasized that it’s important to understand who the winners and losers are in this situation. The winners include two groups: high-dividend-yield stocks and cyclical companies expected to see earnings growth from lower rates, particularly in the housing sector.
Cramer noted that housing stocks, which had seen significant gains, were down on Monday because hedge funds and mutual funds had bought heavily before the Federal Reserve’s Jackson Hole meeting. While mutual funds are holding on, hedge funds are cashing in their profits, as these stocks had sharp increases before the event. For traders, taking profits after such a successful trade is standard practice.
“Let’s start with the most direct beneficiaries: housing. These stocks were all down today because hedge funds and mutual funds bought them aggressively ahead of Friday’s Jackson Hole verdict. Mutual funds are staying long, but hedge funds are ringing the register furiously because they’ve made so much money. Housing stocks had parabolic moves going into the Fed’s Jackson Hole conference, so now these portfolio managers are just taking profits. That’s what you’re supposed to do with a successful trade if you’re a trader.
Remember, these guys are traders, not investors. So, the housing trade is over, but what about the housing investment? I believe Toll Brothers, which just reported a stellar quarter last week, can go higher, maybe much higher. But this reversal is going to constrain the stock because people do not like the technical trends we just saw. We’ve seen multiple long-term reversals after these kinds of moves, and they rarely turn out to be buyable, even though in theory, this should be a great moment for the stock of all the homebuilders.”
Cramer believes that while the housing trade may be over for traders, the housing investment story isn’t finished. He also warned that the recent reversal in housing stocks could limit their potential, as investors are wary of the technical trends.
“It doesn’t matter, though. This kind of reversal I’m talking about can be hideous. Some of these stocks are very close to their highs, and I don’t like that.”
Cramer cautioned that these kinds of reversals can be severe and might discourage new buyers. He reminded everyone that by the time the Federal Reserve signals a clear path forward, it might be too late to buy the most obvious rate-cut winners. According to Cramer, it’s better to wait for these stocks to pull back and recharge before making a move.
“Those who have them can hold on, but they flew too close to the sun to attract new buyers. Remember, I’ve said all along that by the time the Fed gives the all-clear, it may be too late to buy the most obvious rate-cut winners. You have to let them recharge, let them come down, and then you can pull the trigger.”
Our Methodology
In this article, we analyzed a recent episode of Jim Cramer’s Mad Money and picked the ten notable stocks he mentioned. We also explore what hedge funds think about these stocks and rank them based on how many hedge funds own them, from the fewest to the most.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close-up of a colorful high-end graphics card being plugged in to a gaming computer.
NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Investors: 179
NVIDIA Corporation (NASDAQ:NVDA) offers a compelling investment opportunity due to its leading role in the GPU market and its key position in artificial intelligence (AI) and machine learning. Jim Cramer shared a personal story about renaming his dog Everest after Nvidia in 2017 when the stock was just above $3. Over the next seven years, NVIDIA Corporation (NASDAQ:NVDA)’s stock surged by more than 3,000%.
“When I renamed my dog Everest after Nvidia back in 2017, at a time when the stock was $3 and change, who knew it would rally more than 3,000% over the next seven years? Many greeted my name change as a stunt, even as Everest, a rescue mutt who loved me dearly, beautifully answered to Nvidia whether I had a Blue Buffalo-filled steel cup or the more popular T-bone in my hand. That boy would eat anything, including Raisinets stolen from my backpack, which led to a midnight run to the vet…
No matter, my view is simple: Long-term, I believe in the use cases for Nvidia’s chips. I believe in the new industrial revolution as predicted by Jensen Huang, and that’s why I say, ‘Own it, don’t trade it.’ At the end of the day, I didn’t rename my pet after just any company.”
NVIDIA Corporation (NASDAQ:NVDA)’s GPUs, such as the A100 and H100 Tensor Core models, are critical for advancements in AI, high-performance computing, and data centers. This leadership is evident in NVIDIA’s strong financial performance, with Q2 2024 revenue reaching $10.3 billion—a 25% increase from the previous year—driven by high demand in data centers and gaming.
The increasing need for cloud computing and data centers boosts NVIDIA Corporation (NASDAQ:NVDA)’s business, as its GPUs are essential for AI training and inference, and the company continues to secure large contracts with cloud providers. NVIDIA Corporation (NASDAQ:NVDA)’s investments in AI research, including platforms like CUDA and NVIDIA AI Enterprise, are yielding cutting-edge solutions used across various industries.
Additionally, the planned acquisition of ARM Holdings (pending regulatory approval) is expected to strengthen NVIDIA Corporation (NASDAQ:NVDA)’s technology portfolio and industry impact. NVIDIA Corporation (NASDAQ:NVDA)’s gaming sector remains robust, supported by strong demand for its GeForce RTX graphics cards and ongoing advancements in gaming technology.
Aoris International Fund stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter:
“If Information Technology was the dominant sector for the quarter, NVIDIA Corporation (NASDAQ:NVDA), which is the largest supplier of microprocessors used for generative AI applications, was the dominant company. NVIDIA’s share price rose by a third in the quarter and has increased by 255% so far this year. Since the beginning of 2023, its market value has risen by 8.3x, or $4.3 trillion, making NVIDIA the third largest company in the world by this measure.
As a result of the unusually strong stock price performance from NVIDIA and a few other large companies, equity markets have become increasingly concentrated. You can see this in the chart below, which shows that on 30 June, 27% of the market value of the 500 largest US companies was attributable to just five companies, more than twice the average of the last 20 years.
The composition of the Aoris International Fund will always be very different to that of the broader equity market. There will be periods, such as the most recent quarter, where this contributes to our performance lagging that of our benchmark. When it comes to NVIDIA and other AI-centric companies, rapid growth is exciting, but it makes it difficult for us to judge what is normal. Our preference is to own established leading companies where we can make a more confident, evidence-based judgement about their growth and profitability.”
Overall NVDA ranks 2nd on our list of Jim Cramer’s top stock picks. While we acknowledge the potential of NVDA as an investment, our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.