Don’t fight the tape. That’s the message from Piper Sandler strategists on Friday morning. As you know, it’s hard to argue with their views. “Market price action continues to remind us of the simple mantra from the movie Maverick: ‘Don’t think, just act,'” they wrote. “The dominant trend is firmly bullish, rewarding investors who avoid over-analysis of macro noise and instead follow tape leadership. By sticking with momentum leaders and avoiding laggards, investors are capturing market momentum toward new highs.” The key is that winners often win because of returns, not just multiple expansions. Take server maker Dell Technologies. The company is the latest to report explosive quarterly results on the back of an artificial intelligence spending boom. If you’re just looking at the price movement (the stock is up more than 30% on Friday), it’s not unreasonable to think we’re starting to see a bubble move. However, it’s not a bubble if the fundamentals support it, as was the case with Nvidia from the start of its historic performance following the launch of ChatGPT in late 2022. That’s certainly the case with Dell. Wall Street has already raised its full-year 2027 earnings estimate to $16.85 per share, from $13.12 before Thursday night’s report, according to FactSet data. Meanwhile, expectations for next year have jumped from $15.18 to $20.21 per share. This represents an increase of 28.4% over 2027 figures and a 33% increase over 2028 figures. What this means is that despite Friday’s jump, the price-to-earnings ratio based on 2027 numbers has only widened from 24.2x to 24.3x, based on the $410 share price. The 2028 numbers give the company a price-to-earnings ratio of about 20.3 times, which is actually lower than the 21 times multiple it had predicted on Thursday until it realized its expectations were too low. Simply put, if you look at the price fluctuations, you would think this is unsustainable. That’s exactly what people were saying about Nvidia after that legendary May 2023 earnings report, when Wall Street realized how offside it was in the coming wave of earnings. Importantly, if you see these moves and think you should bet on them, think again. The AI spending boom is real. We are now seeing Wall Street catch up to what hyperscale CEOs are saying. The opportunities for AI are far beyond most imagination and require spending on data centers and computing infrastructure. In this regard, Dell’s AI Server has more than 5,000 customers, an increase of more than 50% in the past six months. Talk about growing demand. This is what Nvidia preached in a report last week. Nvidia and Dell are close partners, and Nvidia is the clear winner this quarter as well. We expect to find out more about this when CEO Jens Huang gives a keynote at Computex in Taipei in the coming days. At the same time, no matter how impressed you are with the numbers, we don’t recommend following Dell’s move like this. The reason to proceed with caution has more to do with market mechanics than with fundamentals or valuations. A lot of people just made a lot of money, and when that happens, you should expect some profit taking. Think about it. Some fund managers with positions in Dell may have exceeded their appropriate weights and been forced to strip some due to these monster gains. This leads to the idea why we prefer to trim stocks after a parabolic move. In this case, I’m saying you should wait until names like Dell cool down before starting a position. That can certainly make this a difficult market to fund, but what we can do is track the winners, anticipate corrections, and use that to create a target list (similar to a bullpen watch list) that we can revisit when volatility occurs (as always). As for the AI stocks we already own, this is just another proof that for all the profits made in AI trading (whether it’s in semiconductors like Nvidia, power, or network infrastructure), there’s still plenty of upside left as demand is off the charts. (Jim Cramer’s Charitable Trust is long NVDA. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
