While market sell-offs and volatility can be brutal, the good thing for those with a long-term view is that expensive stocks become much more reasonable and can be added to portfolios. Both semiconductors and the semiconductor capital equipment sectors have been red-hot over the past few years, and with good reason. Demand for memory continues to outgrow supply, and that is expected to continue.
A new Stifel research report makes the case that 2019 will be another outstanding year for the semiconductor capital equipment stocks, with memory continuing to drive the sector.
While it is early, the signs look positive, and the Stifel report noted this:
We are taking a preliminary look at 2019 wafer fab equipment (WFE) spending trends and at this early juncture, we believe 2019 will represent another strong spending year, driven once again by continued memory expenditures. Based on a bottoms up approach of potential fab projects, we are currently forecasting 2019 to be flat +/- $3 billion with a bias toward it being up versus down. We believe the recent market (tech) pullback has presented another buying opportunity for the group and we maintain our positive view on the stocks.
Stifel has numerous stocks in the industry rated Buy. Here we focus on four of the highlighted companies.
This semiconductor capital equipment leader has one of the broadest ranges of exposure to 3D NAND and Foundry display. Applied Materials Inc. (NASDAQ: AMAT) is the global leader in precision materials engineering solutions for the semiconductor, flat panel display and solar photovoltaic industries. Applied Material’s technologies help make innovations like smartphones, flat screen TVs and solar panels more affordable and accessible to consumers and businesses around the world.
The analysts are very positive on the stock, and see Applied Materials benefiting not only on the semiconductor side of the business but also from larger, higher resolution and flexible screens on the display side of the business.
Applied Materials remains the top pick at Stifel, and the firm believes the company will continue to outperform in the wafer fab equipment arena.
Investors in Applied Materials are paid a 1.4% dividend. The Stifel price target for the shares is $71, and the Wall Street consensus target is $70.62. The stock closed Wednesday at $55.56 a share.
This is another strong large cap play for investors. KLA-Tencor Corp. (NASDAQ: KLAC) designs, manufactures and markets process control and yield management solutions worldwide.
It offers chip manufacturing products, such as front-end defect inspection tools, defect review systems, advanced packaging process control systems, metrology solutions, in-situ process monitoring products and lithography software; wafer manufacturing products comprising surface and defect inspection, wafer geometry and nanotopography metrology and data management; and reticle manufacturing products, such as defect inspection and pattern placement metrology products.
The company also provides light emitting diode (LED), power device and compound semiconductor manufacturing products consisting of patterned wafer inspection, defect inspection, surface metrology and data management products; thin-film head metrology and inspection, virtual lithography, in-situ process monitoring, transparent and metal substrate inspection and data management products for data storage media/head manufacturing; and stylus and optical profiling and optical inspection products for microelectromechanical systems manufacturing, as well as products for general purpose/lab applications.
Many analysts feel that KLA-Tencor is less cyclical than peers with best-in-class returns. The Orbotech purchase adds growth/diversity and sales/earnings per share accretion. Risks for the shares include industry cyclicality, relatively muted growth and limited operating leverage.
Shareholders are paid a solid 2.2% dividend. Stifel has a $139 price objective, while the consensus target price is lower at $127.38. The shares closed trading on Wednesday at $109.25.