Semiconductors Sparkle - Zacks Industry Rank Analysis

Industry Rank Analysis 1-19-11

The semiconductor is the basic building block of the modern economy. As the economy revives, demand for the chips that go into not just PCs and iPods but virtually every other product these days is going to rise. After having retrenched from building new fabrication facilities during the Great Recession, the semiconductor firms are finding that they have to step up their capital investment programs.

This week 8 of the top 26 “industries” on the Zacks rank are either semiconductor firms or firms that make the equipment to make semiconductors. In that group I include then Scientific Instruments and Electronic Manufacturing Machinery industries.

The Zacks industry classifications are very fine, with 255 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well, a single firm with good news can propel a one or two firm industry to the top (or bottom) of the charts.

It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list. This is particularly true of the semiconductor and semi-equipment area, where two of those industries have just a single firm, and two more have just two members. If there were not a big cluster of such “industries” at the top of the list, I would probably not be highlighting them.

The Semi-equipment - Materials Systems “industry” is currently at the very top of the list, with a perfect score of 1.00, and up 3 spots from last week. Last week the “average score” was 2.00. However, there is only a single firm in that industry, so the perfect score is a bit less impressive than at first glance. Similarly, the number three-ranked industry, Semi-equipment - Wafer Completion has just two firms, with an average score of 1.50, unchanged from last week.

The biggest of these “industries” by number of firms is also the one with the worst overall rank of the 8 related semi-conductor industries. It is the Electronic Manufacturing Machinery industry, with 18 members. Still, 26th spot for an industry with that many members is a very strong showing, and the industry did improve by 31 spots over the last week as the average Zacks rank fell to 2.44 from 2.72.

The first table below shows the Semiconductor and related stocks that hold the vaunted Zacks #1 Rank (Strong Buy). The second table shows the Zacks #2 Ranked (Buy) firms. Most of the firms are on the small side, particularly on the Zacks #1 Rank list, but should be big enough that most of the readers of this can invest in them.

There are a few larger firms on the Zacks #2 Rank list, ones that even the biggest institutional investor could buy. Valuations on many of these stocks are compelling, particularly if you are willing to look out to next fiscal year's (mostly 2012) expected earnings. Six of the eleven firms  on the Zacks #1 Rank list are sporting single digit P/Es based on those expected earnings.

Number 1 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Asml Holding Nv	ASML	$17,781	12.17	14.58	1.47%	0.00%	$40.83
Novellus Sys	NVLS	$3,323	11.52	12.05	0.10%	0.00%	$36.85
Cymer Inc	CYMI	$1,510	16.06	14.33	3.25%	0.00%	$51.02
Mks Instruments	MKSI	$1,375	9.76	8.67	7.18%	3.28%	$27.32
Entegris Inc	ENTG	$1,043	10.1	9.56	0.00%	-0.30%	$7.91
Kulicke & Soffa	KLIC	$695	10.36	6.5	24.75%	13.85%	$9.79
Adv Energy Inds	AEIS	$658	9.97	8.12	3.01%	-6.56%	$15.20
Atmi Inc	ATMI	$612	17.01	14.66	0.00%	0.00%	$19.50
Mts Systems	MTSC	$576	19.15	17.02	0.00%	0.00%	$37.67
Caliper Life Sc	CALP	$333	N/A	88.13	100.00%	0.00%	$6.61
Rudolph Tech	RTEC	$307	9.95	7.82	0.00%	0.00%	$9.78
Ultra Clean Hld	UCTT	$273	10.61	7.1	0.00%	0.00%	$12.42

Number 2 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Appld Matls Inc	AMAT	$20,333	12.42	11.25	0.90%	1.69%	$15.31
Kla-Tencor Corp	KLAC	$7,035	10.06	10.61	0.74%	1.49%	$42.11
Lam Research	LRCX	$6,480	8.93	9.96	0.73%	1.30%	$52.69
Skyworks Solutn	SWKS	$5,959	21.85	17.84	1.64%	-0.23%	$32.51
Mettler-Toledo	MTD	$4,975	20.11	17.94	0.00%	0.00%	$151.57
Vishay Intertec	VSH	$3,033	9.88	9.21	0.00%	0.00%	$16.25
Perkinelmer Inc	PKI	$3,015	15.77	13.99	0.34%	0.39%	$25.54
Coherent Inc	COHR	$1,230	20.11	18.08	1.14%	2.52%	$49.11
Fei Company	FEIC	$1,035	18.77	16.66	0.57%	0.00%	$27.07
Brooks Automatn	BRKS	$774	10.95	11.6	2.85%	1.16%	$11.85
Newport Corp	NEWP	$667	14.61	15.12	0.00%	0.00%	$18.14
Ultratech Step	UTEK	$568	19.49	15.01	0.00%	14.81%	$23.26
Greatbatch Inc	GB	$562	14.77	13.41	0.99%	N/A	$24.14
Photronics Inc	PLAB	$340	11.56	9.79	0.00%	0.00%	$6.33
Iris Intl Inc	IRIS	$186	29.94	27.05	0.00%	N/A	$10.28
Towerstream Cp	TWER	$180	N/A	20	0.00%	-2.22%	$4.40

In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.

The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.

Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.

The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.

Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php

 
APPLD MATLS INC (AMAT): Free Stock Analysis Report
 
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NOVELLUS SYS (NVLS): Free Stock Analysis Report
 
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