MW Why buying stocks in this hot sector may turn out to be a money-losing bet
By Mark Hulbert
The semiconductor industry has been soaring; that won't last forever
There's a significant correlation between an industry's odds of crashing and its trailing two-year return.
A crash in semiconductor stocks by 2026 has an above-average chance of happening. That's the implication of recent research, which defines a crash as a drop of 40% at some point over a two-year period.
Twenty companies make up the S&P 500 Semiconductors & Semiconductor Equipment Industry Group Index XX:SP500.4530. This includes Nvidia $(NVDA)$], Advanced Micro Devices $(AMD)$], Intel $(INTC)$, Qualcomm $(QCOM)$, and Texas Instruments $(TXN)$.
Read: Nvidia doesn't have a monopoly in AI - though it sure seems that way
The research in question, entitled "Bubbles For Fama," was conducted by Robin Greenwood and Andrei Shleifer of Harvard University, and Yang You of the University of Hong Kong, and published in the Journal of Financial Economics. The researchers did not focus on semiconductor stocks specifically. Instead, they discovered a significant correlation between an industry's odds of crashing and its trailing two-year return relative to the overall market.
The accompanying chart shows that this probability grows along with an industry's market-adjusted performance (its "alpha"). The unconditional probability of a crash is 14%, growing to 20% when that alpha is 50 percentage points. When the alpha is 100 percentage points, the probability grows to 53%. With the S&P 500 Semiconductors & Semiconductor Equipment Industry Group Index, its two-year alpha is 91 percentage points (according to FactSet data )- implying that the odds of it crashing are almost exactly 50:50.
So, how eager should you be to invest in an industry where the odds of it not crashing are no better than a coin flip?
It's important to emphasize that this research doesn't amount to a kiss of death for semiconductor stocks. Fifty-percent odds of crashing is a lot lower than 100%, and semiconductor stocks could very well continue beating the market. The question is whether it's worth the risk.
To illustrate, consider Tesla $(TSLA)$ and Nvidia, two stocks to which in past columns I have applied the professors' methodology in calculating the odds of crashing. ( I extrapolated from their research, since they focused on industry groupings rather than individual stocks.) Tesla shares are down about 50% since their high last summer, and more than 60% below their late-2021 peak. Nvidia, in contrast, has suffered no more than a correction of about 10% at any time over the past couple of years, and is more than double where it stood when I first suggested it had an elevated risk of crashing.
The bottom line? Downside risk is particularly high right now among semiconductor stocks. All but the thrill seekers among you might want to consider pulling some of your money off that particular table.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
More: Nvidia isn't just a chip stock, and could soar 30% when investors realize that
Plus: AMD's stock has been 'in absolute freefall' - but its earnings could spark a chip-sector rebound
-Mark Hulbert
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April 19, 2024 07:21 ET (11:21 GMT)
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