A 40.97% return in 2019 for shares of Applied Materials, Inc. (AMAT) likely is the result of institutional investors buying the shares. This past week, it appears as though there was a lot of buying demand. The way the shares have traded tells a story of a stock gaining alongside a large amount of unusual trading activity.

In the case of Applied Materials stock, it's bullish activity because the shares are heading higher on increasing volumes, indicating that a buyer is likely involved. Over time, we've learned how stocks with a history of strong fundamentals tend to rise in price. Smart money managers are always looking to bet on the next outlier stocks … the best in class. 

The main criteria we look for when betting on upside are a history of strong fundamentals, strong technicals, and big potential buying in the shares. I'll go into the fundamental picture later, but the true tell on the near-term trajectory of a stock lies in the trading activity of the shares.

Simply put, it's all about supply and demand. When demand is higher than supply, the stock rises. When demand is lower than supply, stocks fall. For most of 2019, Applied Materials stock has been gaining alongside unusual buy signals. It's all about stacking the odds in your favor.

For Mapsignals, when we look for an entry on a leading stock, we want to see an increase of potential buying. Just to show you graphically what our unusual trading activity signals look like, have a look at all of the unusual institutional (UI) signals Applied Materials stock has made over the past year.

Looking at 2019, there have been days when the shares appear to have had a buyer. This is notable because stocks move based on supply and demand. What is really catching our eye now is the recent UI buying. After the big sell-off in 2018, the stock is showing healthy bullish activity

Chart showing the unusual institutional (UI) signals made by Applied Materials, Inc. (AMAT)
www.mapsignals.com

In 2019, Applied Materials has logged eight unusually high-volume days, indicative of buying in the shares starting on Jan. 25, 2019 (see chart above). This points to Applied Materials gaining in an unusual way, which suggests that demand for the stock is increasing.

If you are going to make a bet on the direction of a stock, it is prudent to pay attention to how the shares are trading. Just like you don't want to fight the trend, you also don't want to fight a stock that shows increasing price alongside an increase in the volume traded. Someone could potentially be accumulating a position.

Mapsignals' goal is to identify tomorrow's top stocks today. We're basically looking for outlier companies with healthy fundamentals accompanied by outsized unusual institutional trading activity. By studying these data points, we can make an educated guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest-quality stocks.

When we decide on a strong candidate, we consider prior leaders that have a history of technical outperformance. When they show leadership, we see these as opportunities. Below are a few areas in which Applied Materials stock has grabbed our attention year to date (YTD):

  • YTD outperformance vs. market: +21.57% vs. SPDR S&P 500 ETF (SPY
  • YTD outperformance vs. technology sector: +12.19% vs. Technology Select Sector SPDR Fund (XLK)
  • Recent bullish unusual trading signals

Now, we take it a step further and score the best stocks showing unusual trading activity. Below you can see the historical times since 2016 when Applied Materials stock made the top 20 report for Mapsignals. These are the highest-rated signals in our stock universe. Clearly, we caught the massive run-up beginning in 2016. That's exactly what our process is designed to do. This was a monster outperformer from 2016 to 2018. We'd even venture to call this stock an outlier:

Chart showing the top-rated buy signals made by Applied Materials, Inc. (AMAT)
www.mapsignals.com

On top of a technical picture that is strong, one should also look under the hood to see if the fundamental picture supports a long-term investment. Applied Materials has recently seen a contraction in performance … however, the stock could be ready to turn the corner to the upside:

  • Q2 2019 YoY revenue growth rate: -23%
  • Q2 2019 diluted EPS growth rate: -34%

Applied Materials is breaking out recently alongside other high-quality semiconductor stocks. We believe that the current level for the shares is in position for further upside.

The narrative for Applied Materials is that hopefulness surrounding the current trade spat with China is easing concerns over many semiconductor companies. We are always on the lookout for great companies showing usual trading activity in the shares. The best companies tend to trend higher over the long run. All of this points to a long-term opportunity for the stock.

The Bottom Line

Applied Materials stock represents a potential buying opportunity for the long-term investor. Given the lift in price, a potential positive development in fundamentals, and recent unusual buying signals, this stock could be worth a spot in a growth-oriented portfolio. 

Disclosure: The author holds no position in Applied Materials shares at the time of publication.