Expanding AI trade is turning safety stocks into a 'Texas hedge'

When a hurricane looms, panic buying clears store shelves of household essentials like water, canned food, dry goods, and toilet paper. A similar dynamic is playing out in the market. Investors are bailing on higher-volatility growth stocks and running toward the shelter of perceived safety sectors like utilities and consumer staples. The key difference? They may not be so safe.

As valuation multiples across capital-intensive AI infrastructure plays — such as specialized data center hosting providers CoreWeave (CRWV) and Iren Ltd (IREN) — take on water in the form of massive debt loads due to aggressive capex buildouts, investors may want to take a portion of their equity exposure into more protected water. The issue with utilities is that while it is traditionally considered a conservative sector, more recently it has become part of the AI story as the massive data center build-out is accompanied by surging power demand. This is one of the reasons that in recent years utilities outperformed staples. However, if the bloom of the AI rose helped fuel that outperformance, it would be a “Texas hedge” to buy it now on concerns that the AI trade is getting wobbly. In other words, buying so-called safety stocks might actually increase your risk. 

In this context, consumer staples, most easily traded with the Consumer Staples Select Sector SPDR Fund (XLP) is a better choice.

Unlike AI infrastructure, hyperscalers are dependent on enterprise IT budgets and continuous capital infusions. XLP's constituents—led by market heavyweights like Walmart (WMT), the world’s largest grocery store chain, Costco (COST), a perennial “Holly Index” constituent, Procter & Gamble (PG), and toilet paper and diaper maker Kimberly-Clark — generate consistent revenues. I often joke that when the market goes sideways, investors probably need more diapers and toilet paper, not less. Plainly put, consumers buy toothpaste, groceries, and cleaning supplies regardless of macro or micro economic stress.

Consumer staples tend to deliver steady cash flow and XLP distributes a lot of that back to shareholders with a ~2.6% annualized dividend yield. This provides an organic return buffer during market pullbacks, contrasting sharply with high-beta data center operators that re-invest every dollar into equipment and facilities.

Leveraged AI hosts trade at elevated multiples, leaving minimal room for execution errors. Consumer staples offer lower beta (read lower downside in a general equity market pullback).

Options strategy: bullish call diagonal spread

To capture a structural rotation into staples over a horizon extending into early 2027, a long call diagonal is capital efficient and risk-defined.

• Buy January 2027 $85.00 Call: (these are in-the-money) With a ~0.65–0.70 delta, these calls provides a more stock-like exposure for considerably less than purchasing the stock outright (one does sacrifice dividends versus the stock), but this also reduces the “extrinsic” premium associated with buying them - thus less decay or “theta”.
• Sell November $92.00 Call: Assuming these expire worthless one could further monetize short-term upside movements by repeatedly selling out-of-the-money upside calls against the longer-dated position to lower the net cost basis over time. Assuming the long calls remain in the money by expiration the calls can be exercised and one would own the underlying shares.

• Max Risk: Capped strictly at the initial net debit paid for the options strategy.
• Max Gain: Achieved if XLP trends steadily toward the 92–95 target by the nearer dated expiration, are unlimited if the nearer dated options expire worthless and no new short upside call options are sold against the longer-dated calls.
• Strategic Fit: Reallocates capital away from over-leveraged tech exposure into defensive, cash-flow positive staples.

Disclosures: Tidal owns/holds all the securities mentioned in the article.

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