Investor Alert on AMAT

07/02/2004 12:00 am EST

Focus:

John Mugarian

Editor, Investor Alert

"A behind-the scenes rally is brewing," says John Mugarian, editor of Investor Alert. "Oil prices will come down, inflation fears will subside, and profits will be strongjust in time for the November election." Here's his latest stock pickApplied Materials.

"We look for a rally to take the market averages back to the highs for the year and possibly beyond. It’s time for the Dow to rally back to the upper end of its range (to the 10700 mark) and maybe 11000 by year-end. I am looking for the NASDAQ to climb back to the 2220–2300 level. M eanwhile, exaggerated fears of an economic slowdown have knocked down some of the best technology companies in the world. Indeed, the recent pullback in the chip sector appears to be a great entry point for value-savvy investors. The economic recovery has spurred demand for semiconductors worldwide, and chip equipment stocks normally outperform chip stocks by a wide margin under these conditions.

"We believe the recent pullback in the technology sector presents a great opportunity for investors to purchase high-quality stocks like Applied Materials (AMAT NASDAQ), the world's the leading semiconductor capital equipment maker in the world. During the semiconductor boom of 2000, the stock traded as high as $57, and today it’s below 20. I am convinced that Wall Street is completely missing the boat with regards to Applied Materials. Here’s why:

  • AMAT reported better-than-expected second quarter earnings of 22 cents vs. the 19-cent estimate. This is almost 16% better than analysts had expected. AMAT also issued positive guidance for the July quarter, prompting analysts to raise earnings estimates for 2004 thru 2006.
  • AMAT’s management predicts semiconductor capital spending will grow by 40% in 2004, and that the chip industry is still underinvested in capital equipment. Incoming orders rose 32% to the highest levels since the first quarter of 2001.
  • The company announced a huge $3 billion stock buyback in late March. Companies buy back stock only when they feel their shares are undervalued.
  • AMAT is benefiting from the pickup in corporate spending as well as the boom in consumer electronics. The company’s subsidiary, AKT Inc., manufactures CVD systems used to make flat-panel displays for notebook computers, desktop monitors, televisions, and other popular products.

"So if all of this good news is obvious to us, why is the stock so cheap? Investors who were hurt during the 2000–2001 tech wreck are afraid that orders have peaked, and they do not want to be caught in the next technology downturn. I can understand their concern, but their paranoia is two years too early. In fact, momentum is just getting started, and a cyclical upswing is under way. Since I believe that the next cyclical downturn will not begin until 2006, I predict that investors who got out too early will flock to AMAT shares all at once. In addition, chip-equipment stocks tend to outperform chip stocks by a significant margin. When investors begin piling back into AMAT, it will be like a herd of elephants trying to get through a door at the same time. Buy Applied Materials at $21 or less for a run to $29 within a year."

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