Two Votes for AMAT

11/26/2004 12:00 am EST


Yola Edwards

Contributing Editor, Internet Wealth Builder and Top Stocks

The semiconductor sector, often considered a proxy for the tech industry, is notoriously volatile. Despite recent downgrades from the Wall Street community, two leading advisors - Yola Edwards and Dan Kurz - have each issued bullish reviews of Applied Materials.

"The US market has finally broken out to a recent, new monthly high after having consolidated over the past ten months and the continuation formation that it has traced out over the past 19 months indicates that the Dow Jones Industrial Average is headed substantially higher over the next two years," says Yola Edwards, analyst with Top Stocks. "We expect an upside target of 13,160, at a minimum, over the next two years. Meanwhile, our top speculator’s pick is Applied Materials (AMAT NASDAQ). Some analysts have issued bleak assessments for the semiconductor capital equipment market. For example, Morgan Stanley downgraded the sector to ‘cautious’ and Bank of America urged clients to sell the sector’s biggest names, including AMAT. The fact that Applied Materials remained basically unchanged suggests that the news may already be priced into the sector.

"From a technical perspective, some of the semiconductor stocks are beginning to see increased interest in terms of volume and momentum. Since rallying from its low of $10.26 in October 2002 to a high of $27.72 in May 2003, the share price has staged a classic two-thirds retracement of its advance over the past year. Over the past three months, the stock appears to have been tracing out a double bottom. Volume has been increasing noticeably as the stock has been basing, and it decreases as the stock pulls back, which is quite bullish. We caution, however, that in light of the negativity surrounding the sector, investing in Applied Materials would be a contrarian move and should only be pursued by aggressive, risk-tolerant investors."

Dan Kurz, editor of DK Equities, adds, "Applied Materials consistently gained market share during the past decade through a combination of organic growth and select acquisitions and thus outgrew the chip equipment industry by constantly increasing its staple of leading-edge tools and service support. Earnings for the fourth quarter topped consensus estimates, but guidance for the first quarter of 2005 fell far below expectations. "We expect stock buybacks to accelerate, shrinking the share base by 5% - 6% over the course of the year. While we see no earnings leverage in fiscal 2005 from buybacks, the stage will be set for earnings leverage in later years.

"From a long-term perspective, Applied Materials shares make for an attractive investment at current price levels. The firm’s unrivalled new-technology portfolio, expanding support services, and overall share gains in an ever more capital-intensive growth industry (fabs cost over $2 billion) unable to afford downtime bode well for long-term earnings growth. For investors that can afford to look past the next 12 months, endure potentially significant negative sentiment, and possibly a lower share price, AMAT offers a constructive multi-year risk/return profile (15% average share price compounding with above-average share price volatility predicted), in our view. It is in this sense that we confirm our Buy rating."

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