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Stocks  | October 1, 2019

As we enter the final quarter of 2019, most companies are getting ready to report earnings. Today, I’d like to discuss three tech stocks that will likely exhibit volatility and profit taking in the coming weeks. Specifically, the three tech stocks to sell are Facebook (NASDAQ:FB), Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA).

With these stocks, you may consider waiting on the sidelines if you do not currently have any positions open in FB, NVDA or TSLA. Alternatively, if you already own shares in any of these tech stocks, you may either consider taking some money off the table during this market bounce or hedging your position.

As for hedging strategies, covered calls or put spreads with Nov. 15 expiry could be appropriate. Straight put purchases could be expensive due to heightened volatility. Any short-term decline in these shares may offer better entry points for long-term investors.

With all of that in mind, let’s take a deeper look into these three tech stocks to sell in October:

Tech Stocks to Sell: Facebook (FB)

Notable headwinds: Legal woes, decreasing margins and profit taking before earnings

Expected price range until next earnings in late October: $160-$180

Year-to-date, Facebook, the social media and digital advertising titan, is up about 35%. Currently, FB stock is hovering around $177.

Over the past year, there has been a shift in the global political environment. More countries are calling for tougher regulation of the technology giants, including Facebook.

Analysts have also noted that FB stock’s rising costs have been pressuring margins lower over time. Recently Facebook reached a record-breaking $5 billion settlement with the FTC. Management said that due to this cost, FB stock’s recent earnings-per-share were significantly lower than anticipated.

Thus FB stock’s profit margins have suffered, mostly due to the legal expenses and fines regarding the FTC privacy investigation. Now Facebook’s operating margin stands at about 27%. It was 44% in the same quarter a year earlier.

InvestorPlace readers may remember that in March 2018, the Cambridge Analytica controversy put Facebook stock in the limelight. Since then, a plethora of privacy issues as well as alleged violations have been in the news regularly.

Yet believers in FB stock highlight the fact that there are no real alternatives to the company. Although other platforms such as Twitter (NYSE:TWTR) and Snap (NYSE:SNAP) offer a way to connect socially, they are not as popular or comprehensive as Facebook. Therefore advertisers are drawn to FB’s ecosystem. And for investors, FB stock has been a clear winner over time and in 2019.

Nonetheless, it is worth remembering that since March 2018, the FB stock price has not really changed and is still around $180. So if you had been a buy-and-hold investor in Facebook stock, your FB portfolio would not have changed much at the end of the past 18 months.

If regulatory risks continue well into 2020 or beyond, they might end up overshadowing any strong earnings results Facebook may have.

In other words, the current price level may actually continue to act as resistance for Facebook stock unless these privacy issues are settled fully.

Nvidia (NVDA)

Notable headwinds: Earnings season volatility, weakness in semiconductor stocks and trade war worries

Expected price range until next earnings in late November: $170-$180

The stock price of Nvidia, the premiere graphics-chip maker, has been choppy in recent months. And since mid-September, there has been profit taking in NVDA shares. Currently, Nvidia stock hovers around $172.

Chip stocks, including NVDA, have been adversely affected by the ongoing U.S.-China trade war. An important portion of Nvidia’s supply chain is in China.

Our readers may well remember that earlier in May the administration raised import tariffs on computer parts such as graphics cards from 10% to 25%. At the time, Nvidia stock suffered a rapid decline. The tariffs now stand at 30%. Then during the summer, the NVDA share price has recovered until a few weeks ago.

Yet despite the recent slide in price, it might still be too early to get back into Nvidia stock. NVDA stock is trading at a forward price-earnings-ratio of 33x. In comparison, Intel (NASDAQ:INTC) stock’s forward P/E stands at about 11x. Therefore, going forward, shareholders will want strong quarterly results so that the stock price warrants the rich valuation metric.

If you are an investor who also pays attention to technical charts, NVDA stock’s recent price action is urging caution. In the coming weeks, I expect shares to move down toward $160 where it has significant support.

It’s important to remember that Nvidia is a momentum stock. Therefore, if you are worried about entry points, I’d suggest that you wait until NVDA builds a firm base between $155 and $165.

Tesla (TSLA)

Notable headwinds: Question marks over demand for electric vehicles and profit taking

Expected price range until next earnings in late October: $220-$250

This year has been an extremely volatile one for Tesla shareholders. Year-to-date, TSLA stock is down about 27%. Currently, the TSLA share price is hovering around $240.

When Tesla released worse-than-expected second-quarter 2019 earnings on July 24, many investors possibly ended up with more questions than answers on what to expect from Tesla stock for the rest of the year.

The past year has seen the demand for electric vehicles (EV) decline in the U.S. And Tesla’s Model 3 sales have not been at the levels expected. Tesla’s Q2 results showed that the gross margin of its automotive segment is declining.

As we discuss Tesla’s problems, we have to mention that the auto sector is susceptible to the trade-war risk. As the demand in the U.S. declines, Tesla needs to achieve increased sales numbers from overseas, namely from China, which has the largest electric vehicle market in the world.

Currently, TSLA is building a manufacturing plant in Shanghai. However, the details as to when actual production will begin at the plant are sketchy. Tesla is yet to release definite dates and production goals for the plant.

Therefore, before committing any capital into the shares, I’d like to see the next earnings statement, expected in late October.


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