Trade Alert: AI

Possibly our most contrarian trade yet. Plus, a less-contrarian long term trade.

At The Risk Of Looking Stupid…

At the risk of looking stupid if this trade goes against us, I think it’s time to bet on Super Micro Computer (SMCI 0.00%↑). Granted, I said the same thing a few weeks ago, and that didn’t pan out for us.

Let’s revisit what I wrote there before I tell you why I think it’s time to be bullish now:

Our third bullish bet is on Super Micro Computer (SMCI 0.00%↑), a stock which we lost money on betting on its earnings last time. What’s different now? The share price is a lot lower, for one thing, and it now has a Chartmill Valuation Rating of 8 out of 10 (when we bet on it last time, it had a Valuation Rating of 4). It also has a Set-Up Rating of 7, indicating that prices have been consolidating. The other thing is that, as with Boeing, most of the bad news appears to be in the rearview mirror (news of the DOJ investigation, and the accounting issues).

Well, I was wrong about most of the bad news being in the rearview mirror, specifically, the resignation of Super Micro Computer’s auditor, Ernst & Young last week. But here’s why I think it’s time to bet on SMCI now:

• This time, most of the bad news does appear to be in the rearview mirror. The stock dropped nearly 46% after the news of Ernst & Young resigning last week. The one new piece of bad news today, is a report by DigiTimes Asia that Nvidia (NVDA 0.00%↑) is moving orders from SMCI to other suppliers, but SMCI is actually up fractionally despite that.

• Ernst & Young resigning isn’t necessarily the end of the world. This sort of thing has happened before, to other companies, as the Special Situations Newsletter noted on X over the weekend. One example they gave was Verra Mobility (VRRM 0.00%↑), which received a similar resignation letter from E&Y in August of 2023. A few weeks later, VRRM hired another auditor, and the stock is up more than 20% since then.

• SMCI is by all accounts a real business, selling a popular product in a high-growth industry, AI.

• SMCI’s senior executives still have large equity stakes in the company. I don’t quite understand why they were sloppy (or worse) with their accounting, but it would seem to be in their interests to right the ship.

With that in mind, here are my two SMCI trades, plus an additional trade on Tesla (TSLA 0.00%↑) :

Our Two Bullish SMCI Trades

1. Buying the stock at or below $27. This trade filled at $26.30.

2. Opening a vertical spread expiring on November 8th, buying the $30 strike calls, and selling the $31 strike calls, for a net debit of $0.29 (The options market expects a move of about $6 in either direction post earnings). The max gain on 2 contracts is $710, the max loss is $290, and the break even is with SMCI at $30.29. This trade filled at $0.29.

Our Bullish Tesla Trade

1. Opening a vertical spread expiring on December 19th, 2025, buying the $340 strike calls and selling the $350 strike calls, for a net debit of $2. The max gain on 2 contracts is $1,600, the max loss is $400, and the break even is with TSLA at $342. This trade filled at $2.

Exiting These Trades

For the SMCI shares, I’m going to set a trailing stop of about 20%. For the SMCI call spread, I’m going to set a GTC order to exit at about $0.95 and lower that price, if necessary, as we approach expiration. For the Tesla call spread, I’m going to set a GTC order to exit at about $9.50 and lower that price if necessary, as we approach expiration.