A Violent Selloff, Then A Rebound
The Nasdaq Composite fell 5.5% on Thursday, November 5th. It recovered 1.1% Friday and another 2.7% Monday. The damage in individual AI stocks was considerably worse than the index decline.
That repricing has created opportunities in companies whose recent results show accelerating growth. The investment question is how much we’re paying for the earnings those businesses can produce as the AI buildout continues.
Faster Growth At A Lower Price
AXT AXTI 0.00%↑ manufactures semiconductor substrates, including indium phosphide used in high-speed optical connections. Moving data between the chips in an AI system creates demand for the materials and components in those connections.
In its October 29th earnings report, AXT reported revenue growth of 162% from a year earlier and 54% from the previous quarter. Gross margin expanded to 56%, from 22% a year earlier. Net income attributable to AXT reached $25.7 million, compared with a loss a year earlier.
During Thursday’s crash, AXTI was down roughly 20% when we reviewed it for a new trade, with the shares around $38. At that price, the stock cost about 24 times an annualized version of its latest quarterly earnings of $0.39 per share. That comparison assumes the quarter’s earnings recur; sustaining growth depends on demand, capacity expansion and export approvals for its China-based manufacturing.
We liked the combination of a sharply lower price and stronger operating results enough to open another bullish options trade. Our history with AXT helped us assess the opportunity quickly.
A Repeat Winner, And Another Entry
Two previous AXTI trades fully closed earlier this year returned 55% and 347% on their original maximum risk. We then opened another trade on October 26th.
Here was that trade’s original entry plan, including its historical Chartmill ratings. The position is now closed.
We fully closed that three-contract call diagonal on October 28th for a 95% return on original maximum risk in two days. The actual entry was a $2.10 net debit and the exit a $4.10 net credit. Here was the result:
A week later, the November 5th selloff gave us another opportunity in the same business. We opened a new AXTI trade in our rare intraday Blood In The Streets alert, following the earnings report described above.
Our complete exits record tracks the results across our trades.
Finding The Turn Earlier
We’re also applying our early recovery process to identify opportunities while stocks remain well below their recent highs. We start with companies we already follow, look for the first improvement in their share prices, and revisit the business case.
One version looks for stocks at least 20% below their highest close over the previous 63 trading sessions, followed by a close above each of the previous five closes. It also requires 14-day RSI, a measure of price momentum, of at least 35 and above its reading five sessions earlier. We then check the latest results, outlook, funding and catalysts. We explained the approach in our November 3rd Buying The Turn alert:
What happens after the rebound will help distinguish the next opportunities. Stocks that hold their gains, form higher lows and continue to deliver stronger results become more compelling candidates. Weakening orders or guidance would change the investment case.
Protection While The Recovery Develops
Investors who want exposure to a recovery can also choose how much downside they’re willing to accept. Our Portfolio Armor iPhone app scans for the least-expensive qualifying puts and collars to hedge stocks and ETFs. Enter a holding and your loss threshold, and it searches for protection. Tap the image below to see the app.
The hedging tools are also available through Portfolio Armor Basic, alongside our daily Top Names. Portfolio Armor Premium adds complete hedged-portfolio construction.
The crash has improved the prices available in businesses we’re following. Our next entries will depend on the combination of operating progress, an attractive setup and options pricing that lets us take the risk on favorable terms. That’s where we’re looking for the next opportunity.
If someone you know is weighing the tech selloff, share this look at how we’re finding opportunities.
Get our next entry. Paid subscribers receive our exact trade, maximum entry price and exit plan, followed by updates as we manage the position. When another business and an attractive trade structure line up, they’ll get the alert.
Our Start Here guide explains how we find opportunities, structure trades and track the results:
