Jensen Huang is out and Nvidia stock is down—what market pros say about buying dips

Nvidia co-founder Jensen Huang has resigned as the firm's president and CEO, the company announced Thursday. Investors reacted negatively to the news. By 2:30 p.m., shares of the chipmaking giant were down more than 5%, and now sit 31% below their high on October 6.

It's easy to see why Huang's departure, which comes amid revelations of his romantic ties to a woman believed by the U.S. intelligence community to be a Chinese spy, has investors feeling queasy. The company Huang co-founded 33 years ago — and whose chips have powered the artificial intelligence boom — has grown into the firm currently valued at about $4 trillion under his leadership.

"The premise here is that there is no successor to a generational founder," says Michael Monaghan, portfolio manager of the Founders 100 ETF, which invests in founder-led companies. "It's that they're one of one, and what they bring from a vision, execution and grit standpoint is not replaceable."

While some investors are exiting Nvidia positions based on that premise — Monaghan's fund must, per its prospectus — others will see the slip in Nvidia's price as an opportunity to buy a great stock on proverbial sale, he says.

Looking purely at the numbers, the opportunity to buy a stock with Nvidia's prodigious projected growth at its current depressed price "happens once a decade, maybe once in a career as an investor," he says.

In investing parlance, the latter group of investors is "buying the dip" — investing in an asset after a decline in its value in anticipation of a bounceback. Whether it's a prudent strategy for you with Nvidia or any other stock requires some examination, investing experts say — not only of the stock in question, but your own portfolio strategy.

How to think about buying dips

When an investment you own or are interested in declines, your first move is to examine your reason for buying or holding it, says Tom Hainlin, national investment strategist at U.S. Bank Asset Management.

Ask yourself if whatever caused the slide has changed your investment narrative, he says. "Has it changed why I bought the stock or why I'm investing in the market?"

If you own a diversified portfolio and the broad U.S. stock market has declined, buying dips is a relatively straightforward decision, investing pros say. Because the stock market has historically trended upward, each downdraft has offered investors an opportunity to add an appreciating asset at a discount.

"If you have a solid, long-term investment, it's always attractive to buy the dip because you always get a new high," Jeff Buchbinder, chief equity strategist with LPL Financial, told Make It in August. "In the history of the S&P 500, every dip has been attractive because you eventually made new highs."

Individual stocks have no such track record, meaning that a major slide should prompt you to re-examine the thesis behind any given investment, Hainlin says. That analysis is twofold. On one hand, you should rethink the position any one stock occupies in your portfolio. If it's a large enough chunk that a pullback is keeping you up at night, it might be worth paring the position back to put things more in line with your tolerance for risk, he says.

And whether you own the stock or are thinking about buying, a dip is a good time to evaluate your outlook for that investment. If you plan to hold a particular stock for the long term, for instance, you'll have to weigh whether the short-term bad news could have a lasting impact on the firm's profitability.

"Did Nvidia's prospects change as a result of [Huang's resignation]? There's no definitive answer for that," he says.

Monaghan says that, based on historical data, there may be reason to worry. His fund's fact sheet cites data from consultancy Bain & Company showing that founder-led companies vastly outperformed their peers from 1990 through 2014. Even companies that have successfully replaced their founders, such as Apple and Microsoft, have failed to grow as quickly as under original leadership, he says.

Investors will have to weigh the risk that Nvidia will lag without Huang at the helm against the firm's still impressive growth projections — the company will report third-quarter fiscal year earnings results on Nov. 17 — and their long-term belief in the firm's position as a top supplier of microchips that power AI.

"One thing we do know is that AI demand hasn't changed," Hainlin says.