Hindsight on Nvidia Provides a Lesson

Nvidia's (NVDA - commentary - Cramer's Take) stock was up almost 11% Friday, closing at $28.27 after announcing solid numbers for the past quarter and optimistic guidance for 2005. Many will look at its price chart and sigh, "I could have tripled my money on this stock in the last six months."

But before getting stuck in "couldas" or "shouldas," investors should analyze the situation to determine whether the flags that signaled such a move were out there at the right time. Analysis of missed opportunities may prevent us from missing the next one.

This is truly the case with Nvidia. After a terrible earnings report, buybacks by the company and insider purchases signaled a confidence in the company that investors could have picked up on and, as we've seen, profited from.

Out From Behind

On Aug. 6, 2004, Nvidia announced terrible results for its second quarter, missing the consensus earnings and revenue estimates by a large margin. Management's disappointing guidance replenished investors' fears of a semi-cycle downturn because of rising oil prices. After a swarm of analyst downgrades, the stock traded down 35% below the $10 mark on hefty volume. What a painful day it must have been for investors who were in it for the long run. Obviously, many couldn't stand the pressure, and they sold into the weakness until the market close that day.

Only three days later, on Aug. 9, 2004, Nvidia's board decided to take a strong stance against the Street and announced a $300 million stock buyback in answer to the extreme reaction to its quarterly numbers. Running at a market cap below $3 billion, the company was committing to spend half of the $600 million cash on the company's books to buy back more than 10% of its outstanding shares. Some insiders took that move seriously, and in the three weeks following the stock buyback decision, insiders also purchased a robust $20 million of stock in the $10-$13 price range.

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At the time of publication, Alici was long Intel, although holdings can change at any time.

Burak Alici, CFA, FRM, is a founding partner of Alchemy Asset Management, a private investment firm based in Istanbul, Turkey. Alici invests with a global focus, using a broad range of relative value strategies including equity/long, risk arbitrage, capital structure arbitrage, convertible arbitrage and sovereign fixed income. Prior to his work at Alchemy, Alici was an assistant portfolio manager for Ernst Research and Management, where he managed equity portfolios for institutional investors, and head of equity trading at Lindner Asset Management. He holds a master's degree in finance from Boston College and a bachelor's degree in mechanical engineering from Bogazici University, Istanbul. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. Alici appreciates your feedback and invites you to send your comments to [e-mail].