A gain of 104% in 2019 for shares of KLA Corporation (KLAC), formerly KLA-Tencor, tells a story of big buy demand for the shares. This buying is quite recent, and as the move to 5G ramps up, some top-rated semiconductor stocks could be rewarded handsomely. We believe that the rush for this group is happening now.
A great way to uncover tomorrow's winners is to look for great stocks seeing big buy activity, and KLA Corporation could be just the opportunity. Smart money managers are always looking to bet on the next outlier stocks … the best in class. For Mapsignals, it's not enough to look at technicals and fundamentals alone. The key lies in the demand for shares … the big money.
I'll go into the fundamental picture later, but the true tell on the near-term trajectory of a stock lies in its trading activity. 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 2019, KLA Corporation has seen relentless demand – i.e., big buying. As trade fears dissipate, the focus looks to be on the next leg higher for 5G companies.
For Mapsignals, when we look for an entry on a leading stock, we look for big money signals. Just to show you what our big money activity signal looks like, have a look at all of the big money (unusual institutional) signals KLA Corporation stoack has made over the past year. Focusing on 2019, you can see a lot of buy signals (green) throughout the year. What's happening now is big buying rushing in:
Since July, KLA Corporation stock has logged 12 big money buy signals, indicative of buying in the shares (see chart above). This shows that traders are likely thinking that the shares are poised to head higher. These data points suggest that big money appetite for the stock is high.
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. Based on history, the odds suggest that KLA stock is poised for gains. The big money is always looking for an opportunity to buy shares on the cheap. It's all about playing the odds by not fighting the trend.
Mapsignals' goal is to identify tomorrow's top stocks today. We're basically looking for outlier companies with healthy fundamentals accompanied by big money signals (outsized institutional activity). We are looking for the big money bets because big money moves stocks. By studying these data points, we can make an educated guess as to which stocks 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 long candidate, we consider leaders that have a history of technical outperformance. When they show leadership, we see these as opportunities. Below are a few areas that grab our attention:
- One-month outperformance vs. market: +6.73% vs. SPDR S&P 500 ETF (SPY)
- One-month outperformance vs. semiconductor ETF: +0.77% vs. VanEck Vectors Semiconductor ETF (SMH)
- Recent big money buy signals
Now, we take it a step further and score the best stocks showing big money trading activity. Below you can see that KLA Corporation has a rich history of buy signals for Mapsignals since 2018. The main takeaway is how the buy signals tend to recur after a pullback. We think that a new round of buy signals could be upon us soon:
On top of a long-term technical picture that is strong, one should also look under the hood to see if the fundamental picture supports a long-term investment. As you can see, KLA Corporation's earnings growth is very strong, and its revenue growth rate is impressive. We believe that the 5G ramp will cause the revenue growth rate to pop even higher:
- Three-year revenue growth rate: +15.19%
- Three-year earnings growth rate: +21.49%
KLA shares are breaking out as the market breaks to new highs. The company is quietly gaining with demand for its shares. We like the long-term story of the stock. The narrative for KLA Corporation and other high-quality 5G semiconductor stocks is one of a growth cycle in the years ahead.
We are always on the lookout for great companies pressing higher year after year. The best companies in a group tend to out-perform over the long run. Semiconductor stocks have been one of the strongest groups in recent years. All of this points to a long-term opportunity for the stock.
The Bottom Line
KLAC is breaking out with buying pressure. Our big money indicator is signaling that we should take notice. Shares could be positioned for more upside. Given the historical growth in share price and growing fundamentals, this stock could be worth a spot in a growth-oriented portfolio.
Disclosure: The author holds no position in KLA Corporation at the time of publication.