The semiconductor and semi equipment industries merit another look. Cloud services and Artificial Intelligence (AI) technology require increasingly more complex components to power them. Semiconductor-related demand is expected to drive the technology sector’s growth next year. Applied Materials Inc. (AMAT) is poised to capitalize, suggests Rich Moroney, editor of Dow Theory Forecasts.

Semiconductor stocks are forecast to grow per-share profits an average of 30% and sales 18%, while the semi equipment industry is projected to increase earnings 36% and revenue 20%. Meanwhile, recent share-price weakness is being driven by smallcaps and midcaps.

Semiconductor stocks that began 2024 with market values above $10 billion are averaging a 3% total return this year, while stocks valued at less than $10 billion are averaging a 12% loss. Those valued above $50 billion average a 10% total return.

Semi equipment stocks that opened 2024 with market values above $10 billion averaged total returns of 5%, versus 5% negative returns for those smaller than $10 billion. Stocks valued above $50 billion average returns of 15%. Finally, semi equipment stocks tend to perform best in years when their sales are weakest.

Applied Materials Inc. (AMAT)
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The semi equipment industry has averaged a 28% annual price return in years when industrywide sales growth averaged less than 5%, but they returned an average of just 8% in years when sales exceeded 5%. That trend does not hold for semiconductor stocks, which generally perform best when revenue is strongest.

AMAT said in February that the semi equipment market is picking up, especially for tools used to produce memory semiconductors. Applied Materials says it has outperformed its markets for five straight years and expects to do so again in 2024. Management has also expressed confidence about 2025.

Shares were recently up 21% this year and 74% over the past 12 months. The stock has historically performed best when its valuation is lowest. After month-end periods when Applied Materials’ trailing P/E ratio was below 16, the stock went on to average 12-month total returns of 51%, rising 86% of the time.

But Applied Materials has still performed well in other environments, averaging a 12-month return of 25% when the trailing P/E exceeded 16. The stock’s current trailing P/E ratio of 24 exceeds its five-year norm of 19.

Recommended Action: Buy AMAT.

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