There seems to be a valuation bubble in the home-builder and semiconductor businesses. That’s what you get when you apply the methods of a research study from five years ago to the stock market today.
The study was called “Bubbles for Fama,” and it was done by Robin Greenwood, Andrei Schleifer, and Yang You from the University of Hong Kong. The professors explained what a bubble and its following deflation were in terms of certain industries.
If an industry did better than the market over the last two years by at least 100%, it’s likely to fall by at least 40% over the next two years, according to 53% of experts. The chart below shows that the chance of a 40% drop over two years rises to 76% when the previous two-year alpha is 125 percentage points and to 80% when it is 150 percentage points.
This finding gives us a better idea of how likely it is that the semiconductor and home-building businesses will crash. Statista says that over the last two years, the Semiconductors & Semiconductor Equipment Industry Group Index SP1500.4530 0.46% has done 176 percentage points better than the overall market. The S&P 1500 Homebuilding Sub-Industry Index SP1500.25201030 1.33% had an alpha of 121 percentage points over the last two years.
Note that these are just chances, not sure things to happen. The study’s authors make that very clear. There is a 20% chance that the industry will keep doing better than the market even when there is an 80% chance of a drop of more than 40% in two years.
As an example, look at how things have gone since mid-April, which is when I last wrote about the teachers’ bubble study. At that time, one of the stocks that was doing very well was Nvidia NVDA 0.22%. According to FactSet data, the stock has continued to do very well since that column was released, rising about 40%. As of my mid-April piece, Super Micro Computer SMCI 1.90% had an even better two-year return than Nvidia. However, it has fallen badly and lost more than half of its value since then.
Putting money into stocks that are going up in fields that are also going up is like playing Russian roulette in the stock market. Even though these stocks might keep going up, there’s a scary high chance that you will lose. Buying these kinds of stocks is more like gambling than trading.
The stocks in the semiconductor and homebuilder businesses that have done better than the market as a whole by at least 100% over the last two years are shown in the table below. The stocks are shown in order of decreasing two-year alpha. Watch out, buyer.
