Revisiting the analog semis idea - their relative strength, including the smid caps in the space, has been notable in this general risk-off environment.
The relative strength got me to sink my teeth in to what is driving these stocks, and at least in part it is none other than underappreciated accelerating growth due to AI capex.
While in a sense it may feel risky to get long these names because AI trades are blowing up left and right, to me they're quite interesting:
- They're boring cyclical stocks that few if any momentum/leverage traders even think to long
- There are signs that the cyclical elements of the companies are exiting a major trough, see $TXN's latest ER
- There is surprising, largely unknown (to tourists) accelerating growth due to AI capex
My general thesis on the AI trade / blowup is we are going to go through multiple phases.
Phase 1 is now: the market transitions from pricing in the capex bingers (msft, amzn, goog, etc.) as FCF/buyback rich companies to capex heavy cyclicals.
Phase 2: a potential lull/goldilocks period (which might not come) where the massive built up speculative leverage in the system has washed out and positioning has reset. This will be the golden era for capex beneficiaries.
Phase 3: I expect at some point in the future, depending on market forces, we will enter the "slam on the brakes" phase. Here, the capex bingers are going to have to respond to market screaming at them to stop the capex binge by nuking their stock. When this occurs, what we are seeing now in Phase 1 is going to look like a warmup (because it is). Large swaths of the economy are being swept up in the AI trade (I saw a pitch for steel companies as indirect AI beneficiaries, for instance), and when these new drivers of liquidity via capex slam on the brakes the bullwhip will be awe inspiring.
This is the current framework I'm working with - I think we are in Phase 1 now and it will be swift, volatile, and pretty much any crowded trade or long duration asset will get killed while the Phase 1 dynamics are unwound.
If I am right and we enter phase 2 (and don't just fast forward to phase 3), then there is going to be an excellent opportunity to make outsize returns on where capex flows are going.
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Of course, there are many other factors at play, and several assumptions I'm making - I am assuming that the AI ROIC of the mags will not be satisfactory to satisfy the market - maybe it will be. If that's the case then there is a very different looking path, where we have to contend with the pressures of rising unemployment due to AI alongside the massive productivity increases of capital.
I'm also assuming that the market doesn't front-run phase 3 and put us into a recession via the negative wealth affect - this would also likely kill any cyclical, capex beneficiary, quite soon. However, at least with the current strength in a variety of cyclical sectors, there is reasonable doubt this won't happen.
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tl;dr: analog semis are interesting here because they are largely not crowded and under-appreciated AI capex beneficiaries. To name a few: $TXN $ADI $MCHP $ALGM $MTSI
There are other ways to play this, but it's very difficult to find anything that doesn't feel extremely crowded and fit this theme, and we are seeing every day what comes for crowded trades.
