Why Nvidia and these 13 other high-flying stocks are in danger of crashing

By Mark Hulbert

Semiconductor and home-builder stocks appear to be forming a valuation bubble

The home-builder and semiconductor industries appear to be forming a valuation bubble. That's the conclusion when the methodology of an academic study published five years ago is applied to the current stock market.

The study, entitled "Bubbles for Fama," was conducted by Robin Greenwood and Andrei Schleifer of Harvard University and Yang You of the University of Hong Kong. The professors defined a bubble and its subsequent deflation at the level of particular industries.

When an industry over the trailing two years outperformed the broad market by at least 100 percentage points, there's a 53% probability that, over the subsequent two years, it will fall by at least 40%. The probability of a 40% plunge over a two-year period grows to 76% when the trailing two-year alpha is 125 percentage points, and to 80% when the trailing two-year alpha is 150 percentage points, as can be seen in the chart below.

This finding provides the context for understanding the crash probabilities of the semiconductor and home-building industries. The Semiconductors & Semiconductor Equipment Industry Group Index XX:SP1500.4530 has outperformed the broad market by 176 percentage points over the past two years, according to FactSet. The S&P 1500 Homebuilding Sub-Industry Index XX:SP1500.25201030 posted a trailing two-year alpha of 121 percentage points.

Note that these are probabilities, not guarantees, as the authors of this study go to great pains to point out. Even when there is an 80% probability of a greater-than-40% two-year drop, there's a 20% probability that the industry will keep outperforming the market.

A good illustration comes from the performance since mid-April, which is when I last devoted a column to the professors' bubble study. One of the highest-flying stocks at that time was Nvidia (NVDA), which has continued to soar since that column was published -gaining about 40%, according to FactSet data. In contrast, Super Micro Computer (SMCI), whose trailing two-year return as of my mid-April column was even better than Nvidia's, has stumbled badly - losing more than half of its value since mid-April.

Investing in high-flying stocks in high-flying industries is the stock market's version of Russian roulette. While these stocks may keep going up, there's a disturbingly high probability that you will lose. Buying such stocks is closer to gambling than it is to investing.

Read: As third-quarter earnings approach, here are the stocks that analysts like - and dislike - the most

The table below contains those stocks in both the semiconductor and homebuilder industries that have outperformed the broad market over the past two years by at least 100 percentage points. They are listed in descending order of their trailing two-year alpha. Buyer beware.

   Stock/Ticker                       Industry                      Cumulative Trailing 2-Year Return Above S&P 500 
   Nvidia Corp.                       Semiconductors and Equipment  710.3% 
   M/I Homes Inc.                     Home building                 275.9% 
   PulteGroup Inc.                    Home building                 216.5% 
   Toll Brothers Inc.                 Home building                 202.6% 
   Green Brick Partners Inc.          Home building                 201.1% 
   Broadcom Inc.                      Semiconductors and Equipment  187.7% 
   KB Home                            Home building                 165.2% 
   Taylor Morrison Home Corp.         Home building                 139.4% 
   Installed Building Products Inc.   Home building                 136.5% 
   Meritage Homes Corp.               Home building                 129.1% 
   D.R. Horton Inc.                   Home building                 128.5% 
   TriPointe Homes Inc.               Home building                 127.2% 
   Onto Innovation Inc.               Semiconductors and Equipment  125.5% 
   Lennar Corp. Class A               Home building                 106.3% 
   Source: Hulbert Ratings 

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Nvidia's stock has room to run - but analysts see more upside for 6 other chip makers

Plus: This chart shows gold vs. the stock market since Bernanke's famous helicopter drop speech

-Mark Hulbert

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09-23-24 0720ET

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