How to quickly analyze a hot stock like Supermicro

• Stocks like Supermicro don’t come around very often – these shares have more than tripled this year. And they sometimes look too good to be true. Here’s how to spot the next one.

• A combination of technical factors – like stock price, trading volume, RSIs, and candlesticks – can help you figure out a good entry and exit level. But there are a few other things to keep on your radar too

• Stocks with a high percentage of short positions and option interest can move much faster and higher than you would normally expect. So it’s good to keep a handle on those. You’ll also want to be aware of any new shares coming onto the market: they may present an opportunity.

Supermicro’s phenomenal AI-driven catapult has provided investors with plenty of opportunities to make – and lose – loads of money. Its shares may be up 202% this year, but there have been some crash-sized bumps along the way too – and there could well be more of them. So if you’re thinking about investing in Supermicro (or some other buzzy stock), it’s a good idea to take a breather and spend a few minutes on a quick-and-dirty stock analysis. Here’s how to get started, using Supermicro as an example.

How to size up Supermicro.

1. Spot the breakout. Stocks and other assets tend to trade within a certain price range, bounded by a kind of floor, or “support”, at the bottom and a ceiling, or “resistance”, at the top. When a stock breaks out above that resistance level – say hitting a new 52-week high – it’s worth a closer look to try to figure out why. That kind of move can be the start of a potentially bigger push higher, after all. In Supermicro’s case, that happened in January. See, a stock can’t double or triple without making new highs along the way.

Supermicro’s share price and volume traded from June 2023 to 23rd February 2024. Source. Bloomberg

2. Check the trading volume. Now that you can see that a breakout is happening, you’ll want to find out how strong and sustainable this move is. So the next thing to check is the trading volume – simply, the number of shares traded, which you can see at the bottom of the chart above. If it’s rising as the share price moves higher – as Supermicro’s has been doing – that tells you that traders have a lot of conviction behind the move. This works in the reverse direction, too, when everyone’s rushing to sell. And in either case, it means the price trend (the direction the stock is moving) is more likely to continue.

3. Get a second opinion. The relative strength indicator (RSI) can help you figure out if a move higher or lower has been overdone – and is destined for a sharp move in the other direction. An RSI reading above 70 is considered to be a “sell” signal and below 30 is seen as a “buy”. But Supermicro is a great example of why you wouldn’t want to rely on any one indicator alone. Its stock moved above 70 on January 14th when it was trading for about $400. It then rallied to above $1,000 and its RSI reached an extremely rare 99. The last time a stock saw a 99 RSI reading was GameStop in January 2021. The lesson here is: just because a stock looks overbought on the RSI, that doesn’t mean it's an automatic sell. Your brokerage account probably offers you the ability to add technical indicators like RSIs and moving averages to a price chart. If not, services like Koyfin provide that service.

4. Look for a reason for the move. A big price change is more likely to happen if there’s a strong fundamental reason. On January 29th, Supermicro announced earnings and forecasts that were way above analyst expectations. That sent experts all across Wall Street scrambling to raise their target prices for the stock – with Rosenblatt Securities aiming the highest, at $1,300, and Bank of America aiming the second-highest, at $1,070. That didn’t happen when GameStop hit 99 on the RSI, mind you – and that’s because of what sets these two apart: Supermicro has strong fundamentals.

5, Have a look at some candlesticks. When a stock is really moving, you want to figure out what your best play is – whether that means buying in, selling at a profit, or going short. And a candlestick chart, which you can draw using Koyfin, can help. Have a look at Supermicro’s candlestick chart: you’ll see a clear “bearish engulfing pattern”. In other words, that’s an upward candle (outlined in white) followed by a downward one with a higher high and a lower low (solid blue), essentially engulfing the one before it. Like before, you’ll want to confirm that there’s plenty of trading volume accompanying this price change – and there is, as you can see at the bottom of the chart.

Supermicro candlestick price chart and volume. December 2023 to February 21st, 2024. Source Bloomberg.

6. Scan for other news. When volatility is high, profits and losses appear and disappear rapidly, by the day or the minute. So, you’ll want to be aware of what’s happening outside of the stock you’re interested in. For example, Nvidia announced some pretty glowing quarterly earnings on February 21st, and Supermicro rallied 33% the following day. So be sure you stay on top of the big news in business (and, of course, Finimize can help with that).

7. Monitor short interest. Even when a rally is mostly driven by strong earnings and rising forecasts, you’ll want to keep an eye on market positioning. Short interest is a snapshot of the number of short positions held by hedge funds and other market players. Short interest in Supermicro was around five million shares at the end of December, roughly 10% of the total number of shares outstanding. Now, just think back to the GameStop frenzy days and what happens to short sellers when a stock shoots higher: at a certain level, they’re forced to buy the stock, which then sends it even higher, in what’s called a short squeeze. So, with all the hype around AI stocks, it’s worth checking to see if a company has a huge short interest (say, more than 10% of shares outstanding) because they could end up in a short squeeze.

8. Monitor options activity too. Call options give the holders the right (but not the obligation) to buy an asset at a set price. If the underlying stock is above the set price (i.e. “in the money”) when it expires, the sellers of the call options are forced to deliver the shares – and that buying drives the stock higher. Tons of those “in the money” options expired on February 16th, creating a gamma squeeze. And that sent shares even higher. When share prices go a little berserk – in either direction – it’s worth checking the open interest in the options market. Unusual Whales keeps a running list, and you can bookmark it.

9. Watch for new shares hitting the market. Stock prices tend to fall when companies issue new shares because it dilutes the value of the ones that are already out there. And Supermicro is no different: it issued new shares in December at $262 each, raising $632 million to finance its investments and its stock dropped 11% as a result. Still, you’d have had to be quick to take advantage of that selloff: the prices recovered in a matter of days. When a company you like issues new stock, be sure to look into the reasons why. If it’s investing in high-return projects, that could be an opportunity to buy in on the cheap.

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