Rebels Get Glory… But Followers Get Money

Defying convention makes for great fiction…

Legendary playwright William Shakespeare’s Romeo and Juliet is about a pair of young lovers who do just that. They go against their two families’ wishes and fall in love.

In the end, Shakespeare’s masterpiece became one of the greatest pieces of fiction ever written… And 425 years later, it’s still performed in theaters all over the world.

But be careful… Fictional heroes often end up dead.

Just think about Romeo and Juliet… Despite their incessant love, they suffered that fate.

The same thing can happen to rebels in the investing world – figuratively speaking, of course…

The rebel in the markets is the “bottom up” investor. He wants great companies whose shares are reasonably priced… And he couldn’t care less what business they’re in.

I can’t say you should never take this approach. I do it. As investors, it’s in our DNA. But it’s critical to balance that rebellious approach by also being a follower…

I’m talking about a “top down” investor. In this mindset, I also search for great companies at reasonable prices… But first, they must come from within strong industries or sectors.

Let me show you what I mean, using semiconductors…

Semiconductors (or “chips”) are the brains behind electronic gadgets. They’ve powered computers and smartphones for decades. They’re electrical conductors (such as copper) that are affixed to insulating material (such as ceramic).

And growth is accelerating these days… Electronic intelligence is invading formerly staid areas such as cars, household appliances, and remote sensing. Plus, the evolution of these devices means we’ll continually require better chips to support upgraded capabilities.

Despite this technological revolution, every chipmaker isn’t always a “buy”…

Stock prices sometimes rise too far, too fast. Product cycles and competitive dynamics ebb and flow, too.

Demand, pricing, and chipmakers’ profits fluctuate as a result. And over the past couple of years, supply constraints during the COVID-19 pandemic plagued the industry.

Fortunately, we don’t need to be a rebel who defies convention to search for a winner. Instead, we can be a follower and use an investment “hack” to figure out what to buy…

We can look at our Power Gauge system’s rankings for exchange-traded funds (ETFs) that specialize in semiconductor stocks. Here’s how everything breaks down right now…

These rankings reflect company fundamentals, stock valuations, and the behavior of investors who act based on assumptions about the future. And in short, the data tells us that all of these ETFs are buyable right now.

But we can do even better with another “hack” from the Power Gauge…

You see, the portfolios of ETFs are usually weighted by market cap. That means the most money from ETF investors is put into the biggest companies… They get the biggest allocations.

We can take advantage of this setup to outperform the ETFs.

For example, we could cherry-pick better-but-smaller stocks within these funds. We could also own the “core” ETFs, as well as “satellite” investments in the best individual stocks.

In fact, with the help of the Power Gauge, I found two attractive opportunities in semiconductors… Our proprietary system is “very bullish” on both of them right now.

ON Semiconductor (ON) makes chips used for power management and in sensors.

Increasing acceptance of electronics in vehicles is an important growth area for the company. It’s also benefitting from strength in chips for other areas – such as factory automation and energy infrastructure.

When it comes to end markets, Alpha and Omega Semiconductor (AOSL) touches many of the usual bases… It makes chips for smartphones, computers, home appliances, and industrial automation.

The company distinguishes itself through its ability to combine two types of chips – “integrated circuits” that include different kinds of logic and “discrete” chips that focus on a single task. It can innovate efficiently by mixing and matching from its stable of offerings.

These are the kinds of opportunities that top-down investors can find.

Sure, rebels – bottom-up investors – can get a lot of glory and attention if they’re right. But followers like us – top-down investors – can also succeed… And we can do it with less worry and sweat.

Remember, in the end, it doesn’t matter how you get there… Our goal is to make money.

Good investing,

Marc Gerstein

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