The Semiconductor sector has come down to earth while boring utility stocks are showing strength reports Mike Larson.
What goes up must come down. I’m sure you’ve heard that expression before. But for today’s stock market, a better version might be: “What takes off like a Polaris missile — with no downside protection and no margin of safety — is doomed to crash back to earth!”
Exhibit A is the semiconductor sector. Just a couple weeks ago, I wrote about how the recent, annualized gains in chip stocks were wildly extreme. As in, on track to eclipse what we saw in the peak year, 1999, of the biggest tech stock bubble in world history.
But get a load of what’s happening now.
After topping out around $218 on April 24, the iShares PHLX Semiconductor ETF (SOXX) plummeted to as little as $182 on May 20. That’s a 16%-plus loss in less than a month (see chart).
The intensifying U.S.-China trade fight drove this semi sector swan dive. Specifically, President Trump recently signed an executive order designed to make it harder for Chinese smartphone and communications network equipment maker Huawei Technologies to obtain U.S. tech components. While the U.S. later offered some temporary exceptions to the ban, investors are worried the tensions will reduce U.S. chip sales to Chinese customers.
But the news catalyst is really beside the point. My broader issue is that these momentum-driven stocks offer no margin of safety, no valuation cushion and no (or very little) dividend protection.
What they and many other tech/growth companies do offer is extreme sensitivity to both the domestic and global economy. That’s exactly what you do not want at this stage in the credit and economic cycle!
From where I sit, you’re much better off in safe money stocks and sectors. And the market seems to agree. Even as semis were getting pasted over the past several days, guess what hit an all-time high? The Utilities Select Sector SPDR Fund (XLU).
Some might call “utes” -- defensive Real Estate Investment Trusts (REITs), or consumer staples stocks -- boring. But just because they’re boring doesn’t mean they can’t make you money, potentially a LOT of it.
As a matter of fact, XLU has generated a total return of around 23% in the last 12 months. The Real Estate Select Sector SPDR Fund (XLRE) has racked up more than 21%. Those gains are roughly triple the 7.8% return of the tech-focused Invesco QQQ Trust (QQQ) over the same period.
Bottom line
Ever since early 2018, the market environment has been changing. Investors have been wising up to the attraction of stocks that are safe. They’re the right stocks with the right attributes at the right point in the cycle. Sectors like semis are anything but.
That approach has worked out very well for my Safe Money subscribers of Weissratings.com.
If you live near or plan to be in the Seattle area next month, I’m going to be speaking about the importance of “Safe Money” strategies at the MoneyShow Seattle investor conference on June 15-16 at the Hyatt Regency Seattle hotel.
