Recent Market Downturn Says It’s Time to Buy Semiconductors
“You gotta be bleeping me! The market is in free fall and you want to get a latte?”
The phone line went dead. I went to Starbucks and had a latte … by myself.
I didn’t blame my colleague Joe for freaking out. He was under a ton of pressure on that cool October morning.
His fund was sinking fast. It was a few weeks after Lehman Brothers declared bankruptcy back in 2008. The market was plummeting.
When investors panic, they make terrible mistakes and end up regretting them. Joe’s partners wanted to withdraw their money from his fund — they received it during the first few weeks of 2009.
A few weeks after, the stock market started rising.
And it’s risen more than 300% in the past 10-plus years. Investors who sold out of their positions — as Joe’s partners did — missed the bulk of the market’s gains. Once they sold at the bottom, they never got back in.
There is a sector of the stock market that is experiencing selling pressure. And from where I sit, I’m seeing investors throwing in the towel and selling their shares.
Now is the time for smart investors to start buying…
Semiconductors Take a Hit After Huawei’s Blacklisting
In his 2016 campaign, President Trump called out unfair trade practices from China.
To promote exports, China blocks trading partners. Major industrial powers like the U.S. don’t get a foothold in their markets. And it provides subsidies, tariffs and other trade barriers to get an advantage on the competition.
In September 2018, President Trump implemented 10% tariffs on $200 billion of Chinese imports to level the playing field. China shot back with duties of its own on $60 billion of U.S. goods.
The trade war became more heated on May 5 of this year. President Trump tweeted that he intended to raise the tariffs to 25%. China fired back with tariffs on $60 billion of U.S. imports.
One industry found itself in the middle of a slugfest between the world’s two largest economies: semiconductors.
In addition to raising tariffs on Chinese goods, the U.S. also restricted American firms from selling components and technology to Huawei, a Chinese company and the largest telecom equipment maker in world.
Huawei buys many of its chips and components from U.S. companies. Last month, the U.S. put the company on a blacklist. Now it needs approval from Washington, D.C. to buy parts and components from U.S. companies.
This latest development hit the semiconductor sector hard. One exchange-traded fund (ETF) fell more than 10% in May.
Be Greedy: Buy SOXX ETF
The first four months of 2019 saw semiconductor-chip stocks rise on projections of higher demand. The iShares PHLX Semiconductor ETF (Nasdaq: SOXX) climbed from its December low of $156.91 to a high of $211.56 — a 35% increase.
Qualcomm Inc., Texas Instruments Inc., Nvidia Corp., Broadcom Inc. and Intel Corp. make up close to 40% of the ETF’s holdings.
But as the trade war escalated, the stock market soured on the sector. SOXX fell 17% in the past month, and many industry leaders fell more than 20%.
Over a period of five months, the stock market went from euphoria to gloom.
Markets move to extremes when everyone is jumping on the same trend. In the first four months of the year, traders were buying chip stocks because shares were rising. And now that they’ve stopped, investors are dumping them by the bushel.
As sensible investors, this is great news for us.
Many of the companies that make up the SOXX ETF are financially sound leaders in their industry. And they are well managed.
While these companies might experience some soft earnings over the next few quarters, they will rebound over the long term.
The trade war with China will eventually get resolved. It’s not clear when, but I’m confident that it will.
And when the trade war is over, SOXX will soar. The demand for computer chips that power AI, 5G and the Internet of Things will only increase.
Warren Buffett said that the secret to making money in the stock market is: “Be greedy when others are fearful, and fearful when others are greedy.”
I can’t predict when the trade war will be resolved, or when semiconductor stocks will start to rise. But I know that over the long term, SOXX’s holdings will move higher as they power the mega trends that are still very much alive.
Now is a time when others are fearful … and smart investors are greedy.
Editor, Alpha Investor Report