No matter how long you've been investing, you're probably familiar with the old adage of "buying low and selling high." But it's not that simple. And in fact, this advice can often lead to leaving money on the table.
Outsized gains typically come over a multi-year time frame by letting winning positions compound. The best companies have a habit of improving their fundamentals so that they eventually catch up with a premium valuation. This has been the case with a company like Apple, which has compounded its earnings (and bought back its stock) so effectively that it's been able to justify a sustained valuation expansion.
Nvidia (NVDA 1.64%), Taiwan Semiconductor Manufacturing (TSM -0.24%), and General Electric (GE 1.99%) are three well-known stocks that are red-hot but could be still worth buying now. Here's why.
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Nvidia is a smart way to invest in AI
Scott Levine (Nvidia): Falling more than 50% in 2022, Nvidia's stock has roared back in 2023. Since the start of the year, shares of Nvidia have skyrocketed about 160%. While the stock had climbed steadily through the first four months of the year, most recently the catalyst behind the stock's rise was a strong first-quarter 2024 earnings report and guidance for Q2 2024. And, despite the stock's meteoric climb this year, there's still reason to believe shares can fly even higher.
In all likelihood, most investors recognize Nvidia for its prowess in graphics processing units (GPUs). What many may not know, however, is that the company is also at the forefront of artificial intelligence (AI) -- an area that has exploded in popularity recently thanks to ChatGPT. While Nvidia played a pivotal role in the development of ChatGPT, the company's AI offerings transcend this one AI chatbot.
Thanks to its industry-leading GPUs -- critical components in training AI -- Nvidia is highly sought after by companies developing AI systems. In late March, for example, Nvidia announced that Alphabet's Google Cloud will be the first cloud services provider to use its L4 GPU for assisting in the development of large generative AI models. A variety of other industry leaders also rely on Nvidia for their AI platforms, including AT&T, Oracle, and Adobe.
With Nvidia's recent rise, the stock is trading at a premium. Currently, shares are valued at 68 times forward earnings. With this steep price tag, it wouldn't be surprising if investors choose to take profits, resulting in a slight decline. Over the long term, though, with some analysts forecasting the generative AI market to rise from $11.3 billion to $51.8 billion in 2028, Nvidia is well positioned to see its stock outperform the market -- especially since the company relies on much more than simply its AI solutions to keep the lights on.
Taiwan Semi has it all
Daniel Foelber (Taiwan Semiconductor Manufacturing): Shares of Taiwan Semi have rebounded nicely after a brutal 2022. And for good reason. The stock had sold off primarily due to concerns about a slowing economy (which impacts cyclical chip stocks) and Taiwan Semi's geopolitical risk with China. The industry leader now sells for an inexpensive valuation -- sporting a price-to-earnings ratio of 14 (near a 10-year low).
Shares of Taiwan Semi got an additional boost after Nvidia blew expectations out of the water and soared to a new all-time high. While Taiwan Semi doesn't have the direct exposure to AI that a chip company like Nvidia does, it does provide a catch-all way to benefit from a rising tide in AI and robotics.
Taiwan Semi operates a third-party foundry business that receives designs from customers like Apple, Nvidia, and Advanced Micro Devices (among others) and manufactures chips to their specifications. In this vein, Taiwan Semi is one of the more straightforward ways to indirectly benefit from a growing chip industry. Instead of building a new factory and hoping customers come knocking on the door, Taiwan Semi's expansions are more so in response to its customers demanding higher volumes and increasingly sophisticated products.
There's a short list of third-party foundries that can handle a surge in chip manufacturing as a result of AI and other trends -- giving Taiwan Semi a wide moat in addition to massive growth potential. The biggest risk for this company is geopolitical. However, it is combating that risk by expanding outside of Taiwan with a new 4-nanometer fab in Arizona and a sophisticated technology fab in Japan (both are expected to come online in late 2024).
With an inexpensive valuation, industry leadership, growth opportunities, cheap-looking shares, and a 1.9% dividend yield to boot, there's a lot to like about Taiwan Semi stock -- even though it's run up a lot in the last month.
GE's end markets keep improving
Lee Samaha (General Electric): The industrial powerhouse General Electric is up over 55% in 2023 but still has room to run. The reasoning behind this argument is that all three of its end markets continue to improve.
GE is a much smaller company now than in Jack Welch and Jeff Immelt's heydays. Following the healthcare spinoff early this year, GE is now focused on aerospace (mainly commercial with some defense exposure), power (especially gas turbines and services), and renewable energy (wind power and grid solutions).
In aerospace, GE continues to enjoy the benefits of the recovery in commercial aerospace and a gradually improving supply chain. GE Aerospace grew orders by 14% in the first quarter, and its joint venture with Safran, CFM International, is on track to ramp up production of its LEAP engines by 50% in 2023. While the LEAP comes with a negative engine margin, it generates highly lucrative aftermarket revenue spread over decades as the engines are used.
In addition, GE Aerospace may have an opportunity to take market share on the Airbus A320 neo family of aircraft. Its competitor on the airplane, Raytheon Technologies' geared turbofan engine (GTF), has disappointed some airlines with durability issues in harsh environments.
GE Power is heading for another solid year, with management forecasting low-single-digit revenue growth and "slightly better" operating profit than in 2022. However, given that the natural gas price has fallen by 74% over the last year and 33% this year, it's likely that gas turbine usage will increase, leading to more services revenue and a possible increase in investment in gas turbines.
Finally, the infrastructure bill is unleashing pent-up demand in GE's core market, U.S. onshore. As such, GE Renewable Energy orders rose 94% in the first quarter to $5.4 billion, driven by onshore wind and two large grid solutions orders to connect renewable energy sources to the grid.
Given the strengthening momentum in its end markets, there's plenty of reason to believe the industrial company could exceed its earnings guidance.
