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Tickers in this Article: CCMP, ATMI, VECO, UTEK, BRKS, COHU, KLIC
An investing rule I live by is that I'm far more interested in what investors are doing with their dollars than what they're saying with their lips. The former drives stocks higher and lower, while the latter is quite meaningless when all is said and done. For that matter, sometimes what they do with their dollars may not even matter - at least not on a permanent basis. IN PICTURES: Eight Ways To Survive A Market Downturn

And what new trends are investors putting into play with their actual buy/sell decisions? A group from the tech sector is heating up - semiconductor equipment and materials. To really throw us a curve ball, the stocks that are falling into favor the fastest aren't even the familiar large caps; it's the small and mid caps – a lot of names some of you may have never even heard of. But enough talk, let's go comparison shopping.

Just the Facts
Since the end of May, the S&P 500 (Large Cap) Semiconductor Equipment Index is down about 1.5%, versus the S&P 500 Index's loss of 2.0%. Nothing impressive so far, right? For the same time frame, however, the S&P 400 (Mid Cap) Semiconductor Equipment Index is up 6.0%, while the S&P 600 (Small Cap) Semiconductor Equipment Index is up 8.7%.

A little disparity between market caps within an industry is normal, but this is more than a "little" for a six week period. That differential is a full-blown divergence - possibly one worth playing. For the record, this performance divergence holds up across most of the near-term time frames.

The semi-equipment industry isn't the leader for any of those time frames for any market cap, but what these stocks lack in explosiveness they've made up for in consistency. The bigger message here is – on a relative basis – the market is seeing something special enough with these names that they're buying them in a big way. As an investor, this is a subtle but important edge to uncover.

Are They Worth It?
I like momentum, but eventually a stock has to justify a price if it wants to hold onto it. So, the second prong of my two-part test is the requirement of at least decent fundamentals. This is where things start to unravel for the emerging trend. (Find out more about momentum investing in our article Riding The Momentum Investing Wave)

Because we're not interested in the large-cap semiconductor equipment names due to their clear lag, we can remove them from our analysis. I'm also going to take the mid caps off the table as well, just leaving the small caps to review.

It's not the entire story, but a quick look at the fundamental snapshot serves up some, shall we say, unexplained gains coupled with some unfair lagging.

Trailing 12 Mo. P/E
Forward-Looking P/E
Net Margin (TTM)
% Gain since end of May
Cabot Microelectronics
Veeco Instruments
Ultratech Inc.
Brooks Automation
Cohu Inc.
Kulicke & Soffa Inds.
Data as of July 13, 2009.
This data begs the question: what's the market getting so excited about?

What Does It All Mean?
I'm no particular fan of analyst estimates, but only because they're usually too optimistic. When they're pessimistic (as many are in this case), the forecasts are a little easier to believe. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

I'm also fully aware that you own a stock not for where it's been, but for where it's going. If we're to believe the analyst's estimates, however, it doesn't look like Veeco, Brooks, Cohu, and Kulicke & Soffa are going anywhere anytime soon, even though their stocks have rallied.

The lesson is simple – sector and industry influence is powerful stuff. It can even override common sense on occasion. It's also a good reason to learn the difference between a dead-cat bounce and a true rally. The actionable idea is equally simple – Cabot, ATMI and Ultratech can justify their stock's strength, while the rest of the names here can't quite do the same yet.

Bottom Line
With an economic recovery already underway, I'd be willing to broadly bet on improving outlooks for these companies. But, assuming a certain stock is a recovery play before it really materializes can be risky business. I'll give at least a little credence to the analysts' insights. Choose wisely here, even if you differ from many other investors.

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