Semi Slump Shows (Again) Why 'Safe Money' Stocks are a Smarter Play

Wednesday, May 22, 2019

What goes up must come down. I’m sure you’ve heard that expression a million times 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 two 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 at the peak 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, Rated “B-”) plummeted to as little as $182 on May 20. That’s a 16%-plus loss in less than a month.

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. 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, Rated “B-”).

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, Rated “B-”) has racked up more than 21%. Those gains are roughly TRIPLE the 7.8% return of the tech-focused Invesco QQQ Trust (QQQ, Rated “B-”) over the same time period.

Bottom line: Ever since early 2018, the market environment has been changing. Investors have been wising up to the attraction of stocks like those I focus on in my Safe Money Report, and rightly so.

They’re the right stocks with the right attributes at the right point in the cycle. Sectors like semis are anything but. If you want to hitch your ride to this trend, then click here to give my Safe Money newsletter a try.

Also, 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 investor conference there. It runs from June 15-16 at the Hyatt Regency Seattle hotel.

You can register for free by clicking here or calling the MoneyShow team at 800-970-4355 and telling them I referred you. Hope to see you there! 

Until next time,

Mike Larson

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