Lam Research Outlook Sends Chip Equipment Stocks Higher

Semiconductor equipment stocks have shrugged off shrinking chip demand this year to post market-beating gains. In August, industry group World Semiconductor Trade Statistics predicted that the global semiconductor market will contract 13.3% to $468.8 billion this year, amid economic uncertainty driven by the U.S.-China trade war, Brexit, and tepid smartphone demand.

However, as we enter the final few months of 2019, the semiconductor market appears to be bottoming out, just as many executives at leading chip companies thought it would do when giving forward guidance earlier in the year.

Financial results released from Lam Research Corporation (LRCX) after the closing bell on Wednesday provide a case in point example. The Fremont, California-based chipmaker reported fiscal first quarter 2020 earnings per share (EPS) of $3.18, easily eclipsing Street expectations of $3 per share. While the company's revenue for the period of $2.17 billion fell 7.1% from the year-ago quarter, it still topped consensus forecasts by 0.7%.

Management remarked during the earnings call that the company anticipates seeing improvements in the memory market, driven by demand from NAND technology, and for oversupply conditions to ease. As a result, the chip manufacturer sees second quarter EPS coming in between $3.60 and $4, substantially above analysts' previous estimates of $3.16. As of Oct. 25, 2019, Lam Research stock has a market capitalization of $38.47 billion, offers a 1.97% dividend yield, and is up almost 100% on the year.

From a chart perspective, the stock has made higher highs and higher lows over the past 10 months, with price consolidating in a tight range since the start of September to form an ascending triangle – a pattern that indicates continuation in the direction of the trend. Lam's better-than-expected earnings helped fuel a breakaway gap on heavy trading volume that could trigger further momentum-based buying. Those who take a long position should think about securing profits using a trailing candlestick stop. For example, raise the order underneath the low of each new candle. Traders who use this technique would place an initial stop underneath yesterday's low at $251.96.

Traders should also add Applied Materials, Inc. (AMAT) and KLA Corporation (KLAC) to their watchlist. Each stock set a fresh 52-week high on the back of Lam's favorable outlook and sits well positioned to add gains ahead of their quarterly earnings releases over the next month.

Applied Materials, Inc. (AMAT)

Applied Materials provides manufacturing equipment, services, and software to the semiconductor industry through three business divisions: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. Analysts anticipate the chip equipment maker to post fiscal fourth quarter EPS of 76 cents on revenues of $3.69 billion, reflecting a top- and bottom-line year-over-year (YOY) decline of 8.08% and 21.65%, respectively. Looking forward, the company's 2020 sales are expected to increase by 8%. Trading just above $55, with a market cap of $49.45 billion and offering a 1.66% dividend yield, the stock has gained 70% this year, outperforming the semiconductor equipment and materials industry average by 4.38% as of Oct. 25, 2019.

The chip company's share price has trended consistently higher throughout 2019, with only several minor pullbacks to the 50-day simple moving average (SMA). The stock broke above a three-month ascending triangle on above-average volume Thursday to set a new 52-week high at $55.12. Active traders who expect a continuation of the trend should book profits on a move up to the March 2018 high at $60.62 and limit downside with a stop-loss order placed just below the triangle pattern's top trendline.

KLA Corporation (KLAC)

KLA Corporation manufactures process control and yield management solutions for the semiconductor industry. Wall Street expects the Milpitas, California-based chip manufacturer to deliver adjusted earnings of $2.20 per share for the September 2019 quarter, indicating a YOY contraction of 10.6%. Keep an eye out for an earnings surprise, given that the firm has surpassed bottom-line projections over the past four consecutive quarters. On the revenue front, analysts forecast the metric to come in at $1.35 billion, representing YOY growth of 23.6%. Meanwhile, the Street expects the company's top and bottom line to increase respectively by 13% and 5% in 2020 and 2021. As of Oct. 25, 2019, KLA Corporation stock has a market value of $26.74 billion and has rocketed over 90% higher YTD. Investors also enjoy a 1.88% dividend yield.

Apart from a 21% retracement in May caused by a Trump Administration ban on U.S. chipmakers doing business with Chinese telecommunications giant Huawei Technologies, KLA shares have continued their impressive march higher. The stock jumped over 6% in Thursday's session from a five-month trendline that connects nicely with the 200-day SMA. Given that price sits at a 52-week/all-time high, let profits run by using a fast period 10-day SMA as a trailing stop. For instance, exit positions when the price closes below the moving average. Set an initial stop order beneath the Oct. 23 low to protect against a sudden reversal.