Facts changed and part of tech sank. We're changing our view and trimming exposure

Published Mon, Oct 10 20223:14 PM EDTUpdated Mon, Oct 10 20223:19 PM EDT

We're selling 150 shares of Qualcomm (QCOM) at roughly $115.16 each. Following Monday's trade, Jim Cramer's Charitable Trust will own 700 shares of QCOM, decreasing its weighting to 3.03% from 3.66%. In addition to this Qualcomm sale, we would be trimming back our positions in Advanced Micro Devices (AMD) and Nvidia (NVDA) to 1% weightings each if we were not restricted from trading them. Their current weightings are both around 1.5% of our portfolio. In Monday's broad semiconductor decline, we're holding off from paring back our Marvell Technology (MRVL) exposure for now. Consistent to what we have been saying, it has already de-rated significantly lower and it has the least consumer exposure of the group. But this is a situation we're actively monitoring. Accordingly, we are downgrading our ratings on all four semiconductor stocks to 2. We'll update our price targets around the earnings reports, but we acknowledge they all have a negative bias to them. While this QCOM move is a tough sale to make — and the AMD and NVDA trims will hurt whenever we can make them — we believe it is necessary to reduce our exposure to a group. It's too tough to own so much of a group that's going through a period of significant price-to-earnings multiple compression and earnings cuts — trends that will continue as the economic data worsens. Fortunately, we own less semis than we did closer to the start of the year. In fact, the action we are making Monday is somewhat similar to the exercise we did in April when the Federal Reserve started to talk tough about inflation. Between April 6 and April 11th , we slashed our positions in Marvell, AMD, and Nvidia at prices that felt low at the time — but in actuality, turned out to be timely as we protected the big gains we had in each position. As we think about what happened to this industry that once promised secular growth year after year, it has been two-fold. There has been a massive slowdown, if not collapse, in the consumer electronics industry. From personal computers to smartphones, the electronics that were gobbled up over the past few years due to the rise in hybrid work and Covid pandemic stimulus payments are now going through a massive inventory correction. There's very limited visibility into how long it will. This information isn't revelatory, but it was accentuated last Thursday night after AMD reported a revenue shortfall of more than $1 billion in a segment that management previously viewed as largely de-risked. Demand for PCs fell off a cliff. The much bigger issue is what we consider to be new information, and it's why we are taking action. The export restrictions the U.S. government is placing on semiconductor companies is a newer risk that we have to increase caution around. It first started with artificial intelligence chips for Chinese customers with military end markets, it expanded Friday to chip-manufacturing equipment used to make advanced memory chips — and now Monday, we are worried that it could be extended to the sales of all high-performance computing. Those are the chips that go into data center, inference, and networking applications. This is what we fear the most. Almost no chips would be immune. This is a very new position of ours and when the facts change, we have to change our stance. Our interpretation of the rules is that the U.S. doesn't want any U.S. company to sell anything to China that could be used as a weapon. Before the data center wasn't considered a weapon — but now, it looks like the government wants to go full stop against China. This is creating a lot of uncertainty, which the market always hates because it makes it too hard to estimate where earnings will land next year. Of course, one could argue that the group's sharp year-to-date declines front runs some big earnings cuts that are likely to happen in the future. But as we saw with AMD before its preannouncement, things can always get weaker and the numbers still have further room to fall. With a loss of certain sales from China, the earnings outlook won't quite be the same, which could lead to investors becoming less willing to pay up for those future earnings. Also, it will be hard for the multiples on semiconductor stocks to re-rate higher from here, unless we get some pivot from the Fed, which we do not expect any time soon. One could also argue why not move completely to the sidelines and sell everything? Sure it's possible that we could side-step more declines, but the problem is you won't know when to get back in. Micron Technology (MU) is a good example of a company that pre-announced bad numbers, gave an awful outlook when it came time to report, but the stock is higher Monday than what it was prior to the print. That's why we think the best course of action is to right-size these positions, and not cut and run completely. Now, these are all still great U.S. companies and they could bounce if China changes its ways — hard to believe, but possible — or if everyone adjusts numbers down and the rest of their businesses start to improve. Unfortunately, we are not close to that moment. So despite the decline, we still must take action. It hurts to sell some QCOM at a 30% loss, but we play with an open hand and when the facts change — and we didn't see this U.S. policy initiative coming — we have to take action. These stocks are down big, but we take solace that we sold the bulk of our positions at much higher prices and have taken a more defensive posture to our portfolio over the past few months. (Jim Cramer's Charitable Trust is long QCOM, AMD, NVDA and MRVL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Cristiano Amon, chief executive officer of Qualcomm Inc., in New York, on Friday, Sept. 23, 2022.

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