Applied Materials (AMAT)

There are 4 big trends in tech. Big data, enhanced smart phone sales, the internet of things and artificial intelligence. They serve all these markets. He thinks it has a pretty reasonable multiple, and good growth. (Analysts’ target: $68.50).

The world's largest provider of manufacturing equipment, service and software to the global semiconductor industry. Beyond semiconductors, they are the leading supplier of manufacturing tools for flat-panel displays, LEDs, LCDs and OLDEs (a new thing), which will become foldable OLDEs in the future, and will lead to more demand for their products. Also, solar energy devices. Instead of trying to choose which semiconductor company will do the best, choose the one that supplies to all of them. The PC Internet era is maturing now, but now we are looking forward to the growth of mobile and social media usage. That will create demand for chips. Trading at 14X forward earnings with a 15% long-term growth rate, which is pretty cheap. Dividend yield of 0.7%. (Analysts' price target is $68.50.)

Chart shows a long upward trend from 2016, and the stock is still on trend. It bounced off the trend line recently. The trend is still up, so if you can tolerate the volatility, you are probably okay.

There are 4 key structural themes in technology. Cloud-based computing, software as a service, the Internet of Things. This makes equipment that makes semiconductors. Estimates are that the average house will have 17 connected devices over the next 3 years. From early to the middle of October, the market started to consolidate. While the percentage of stocks in uptrends didn’t deteriorate, it went from 78% of stocks with positive weekly price momentum down to 30%. In the last 3 days, the leadership groups have re-accelerated, broke out and made new highs. This company fits right into that camp.

Trouble he has with this is that China is building out a foundry industry and need a lot of products this company is selling. Historically it has had a very strong balance sheet with more cash than debt. It is a very, very cyclical business. We haven’t had a serious correction in the semiconductor business for the better part of 4 years, which is very unhealthy. The major driver is China, but they tend to distort nearly every industry it gets into. He is waiting to get back into this, but is waiting for the next correction. Typically, a correction happens for the semiconductor equipment companies about 6 months in front of the traditional semiconductor companies. He would stay away for now.

The optimal time to buy is between December 1^st and Feb 21^st, producing a 10.86% return normally. We have seen some problems this year. There was a constant rising trend line. It has been a great run, but now we have a short term double top at $47.50. The lower limit is $42 and if we break that support there would be a further $5 move down. We are out of the period of seasonal strength. It should decline 10% before the end of October, seasonally.

They make the machines that make semiconductors. It is a tough industry to follow. Don’t own second derivative companies like this one. At any given point in the cycle it could come down hard. You will lose a lot of money when this cycle comes to an end.

(Market Call Minute.) He likes the semiconductor space. This is trading pretty close to its highs, and is a great large cap way to play the next cycle in manufacturing.

This closed at $20.54, and his model price is $26.27, a 30% upside. There is more value elsewhere such as Oracle (ORCL-N) and Microsoft (MSFT-Q).

He is looking to exit because they tend to peak out about now.

(A Top Pick Oct 15/12. Up 67.08%.) Sold his holdings with a 40% profit. Felt that the semiconductor market was ahead of itself. Growth stocks tend to attract investors when the market sentiment improves and this is what happened. This market is maturing and the growth is not going to be there.

(Top Pick Jun 1/12 Up 49.08%)

Semiconductor equipment provider. Typically runs in the 1^st and 4^th quarter. Buy in the $10 range and Sell in the $12.50 range. Very predictable cyclicality.

Good balance sheet. 3.5% dividend. Has a buy-back in place. This is a cyclical that tends to trade in front of the semi cycle and he is seeing inventory rise so this naturally should trade up. He is looking for a $12-$13 target.