Maybe we are in the wrong stocks. Maybe we have to switch out of expensive so-called safe stocks and go into stocks that have gotten so cheap they can no longer be ignored.
That's the conversation every stock picking hedge fund manager is having right now and it's being driven by a handful of stocks, the semiconductors versus the food and drug stocks and it is so stark that it kind of blows my mind.
Rotations, which is what we are now undergoing, are very hard to understand. Most of the time you can't figure out how in heck the "market" suddenly decides to turn against what it loved and embraced and what it had hated until this very day.
So to give you the context we need to talk about how stocks bottom and how they top out and why you need to be careful right now because as I said the other day, it's a Bob Dylan market and the times they are a changing.
I don't want to simplify too much here goes. Last night three semiconductor companies reported: Texas Instruments (TXN) , Xilinx (XLNX) and Lam Research (LRCX) . The first, Texas Instruments, makes pretty much garden variety chips you see in everything from autos to homes to devices of all kinds, including those that are involved in the internet of things. It actually reported a ho-hum quarter and deceleration from the quarter previous. Given its broad panoply of industrial customers, call this one a victim of the world's slowing and of Jay Powell's overzealousness to trash the economy in order to save it from non-existent inflation.
The second, Xilinx, reported a quarter that was a thing of beauty. How could it not, it's in every single hot market, from defense to artificial intelligence to the data center to self-driving cars, and best of all 5-G, the next generation telco scheme that needs incredibly high-powered chips that Xilinx specializes in. Unlike Texas Instruments the company was ebullient about its prospects. It's pretty much the first quarter for 5g, some would say it hasn't even started yet, and Xilinx is, by far, the best way to play it.
The third, Lam Research, is a semiconductor equipment company, meaning it makes machines that can make Drams and flash memory, both of which are in pretty much free-fall pricing, although Dram is holding up better than flash.
Until this quarter Lam has disappointed and disappointed and its stock dropped from $234 to $122 and closed last night at $139. Actually this time it pretty much crushed the estimates. It gave an outlook that subtly told you that the worst may be over and it bobbed and weaved on the call about whether this was the last bad quarter or not.
Now you may believe them or you may not believe them. You may say, wait, this is a new guy, Tim Archer, the man brought in to replace frequent guest Martin Anstice who was dismissed for personal issues that were mentioned on the call but dismissed as just personal and nothing financial.
But I say, wait, I don't' care that it is Archer, who was from Novellus, the fabulous company Lam bought a few years ago, who happens to be a totally hands-on guy.
It's what he did besides talk. He announced a $5 billion buyback. This was, until today's incredible move in the stock, a $20 billion dollar company! Crazy? Insane? Not a sign that there really is a bottom. He's taking a page from the old Novellus handbook where the company always came in and bought their own stock huge when the management believed the bottom one day soon will be put in.
Why now? Why not wait until you see the whites of their eyes, the actual bottom?
Simple, because Archer knows as did the old Novellus CEO, Rick Hill, you have to anticipate the bottom to buy stock and you have to believe that these semiconductor companies can only wait so long before they come back to the table and start buying again.
So what happens to the stocks? Holy smokes. Texas Instruments rallies five points or 5.80. Xilinx advances $16 points or 18% and Lam roars 20 points or 15%.
Those are incredible gains. But what's really crazy is even after these moves Texas Instruments and Lam -- not Xilinx but TXN and LRCX -- are still cheap with Texas Instruments selling at 17 times earnings with a 3% yield and Lam going for ten times earnings with a 2.7% yield.
That's right, you heard me even after these wild moves the stocks can still be bought. They are too inexpensive to pass up or why the heck would Lam try to buy a quarter of the company?
Now the semiconductors are a sector which means they have sector ETFs which means they are joined at the hip which means there are stocks that flew up today even as we have no idea how they are doing or because they have given us negative outlooks recently, like Nvidia (NVDA) or Micron (MU) or Applied Materials (AMAT) and the like.
No matter, ETFs rule and these stocks are going to rally in tandem and most likely will continue, after some mild, profit-taking because they all seem very cheap if there is really going to be a bottom in sales and earnings. Wait, you might say, I just told you that Texas Instruments was downbeat because of its industrial chip weakness. I would come back and say, hold your horses, Texas Instruments business was hurt because of Powell's imprudent call for four rate hikes last October. You take that off the table and why can't TXN run?
Now how about that rotation I talked about? There's a company I like very much, McCormick (MKC) , the spice company. It's been on a tear ever since it bought Franks and French's, the hot sauce and mustard maker, for $4.2 billion in August of 2017.
In fact the stock has rallied from $105 to $155 in the wake of that deal although it's been dripping down of late. Until today. Today the darned thing crashed, shedding sixteen points. Why? Because it missed the quarter on the top and bottom line, grew revenues only 1% and guided down substantially.
Huh? Weren't we supposed to be safe in a food stock that does well no matter how the economy rocks and rolls? Weren't condiments the ultimate in safety? I guess not. Worse, even after the stock has sold off so badly it still sells at about 22 times earnings, dramatically more than the stocks of Lam Research and Texas Instruments with a lower yield and perhaps the beginning of a decline rather than the start of an advance.
So now let's put it all together. What happened here today is a recognition by many money managers that they are paying too much for the drug stocks and the food stocks and too little for the building block techs. Oh, the rotation didn't spare the expensive techs, the ones like the cloud kings. VMware (VMW) Adobe (ADBE) , Salesforce (CRM) , they all got hurt. Apple (AAPL) went down again. Why not? None of the semis that rallied had anything good to say about the current generation of cellphones.
Nope, what mattered is managers just said what the heck do I need safety for when it is overpriced when I can buy cheap and make a whole year in a day. That's what a rotation is about. That's what happened today and it is rarely a one day thing, which means it is not too late to buy the newly loved or to trim the now despised -- at least if you have huge profits and don't want to see them drown without a life raft.