Many semiconductor equipment stocks have posted major advances in the past year and some investors are becoming increasingly concerned that the good times won't last. But there are five major reasons why these shares should enjoy continued upward momentum, even as sales of chipmaking equipment slows down in 2018 after a strong 2017, according to KeyBanc Capital Markets, a division of regional banking institution KeyCorp (KEY), in the latest issue of Barron's.

Applied Materials Inc. (AMAT), one of several stocks recommended below by KeyBank Capital, has the potential to rise by nearly 20%.

5 Key Drivers

KeyBank Capital says those major drivers include: first, strong cash flow; second, attractive valuations; and third, robust end market demand. KeyBank Capital argues this strong demand will come from a key source: as cloud service providers mushroom in number and machine learning expands, more data will need to be analyzed and stored, boosting demand for chips and chipmaking equipment. Fourth, the bank expects demand to outstrip supply in certain sectors of the market; and fifth, China's inefficient tech sector will need to import large volumes of chips to meet its manufacturing needs.

These companies produce the equipment used by other manufacturers to fabricate semiconductor chips, or to assemble, package, and test integrated circuits, as described by Value Line Inc. 

Five Favorite Stocks

KeyBank Capital recommends five semiconductor capital equipment stocks, per Barron's. These companies, with the bank's price targets and the implied gains from Monday's opening prices, are: Applied Materials Inc. (AMAT), $57, +19%; Lam Research Corp. (LRCX), $202, +16%; MKS Instruments Inc. (MKSI), $100, +14%; Teradyne Inc. (TER), $40, +11%; and Entegris Inc. (ENTG), $30, +9%.

Applied Materials, Lam Research, MKS Instruments, and Teradyne also pay dividends. Their current yields are, respectively: 0.85%, 1.04%, 0.81%, and 0.76%.

Cobots and Other Driving Forces

Each of these stocks has different attributes. Applied Materials has product and market breadth, KeyBank Capital says, plus a low valuation, high cash flow, and high returns (such as ROE and ROA). Lam Research is cited by KeyBank Capital for strong execution, low valuation, and for being in "the sweet spot for semiconductor technology shifts," as quoted by Barron's.

Then there's MKS Instruments. Its diverse end markets brighten the company's growth prospects, while it also has high earnings leverage. For Teradyne, KeyBanc mentions that "advanced test trends are positive," per Barron's, and adds that its cobot revenue should exceed $1 billion by 2021. Collaborative robots, or cobots, are designed to interact with humans in a common workspace, in contrast to other robots that work autonomously. Last, Entegris offers steady growth in KeyBank Capital' opinion, despite a slowdown in capital expenditures among its customer base.

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