Lam Research Looks Attractive

Ascendere Weekly Ranking Update:  December 17, 2010

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Every week we update our list of the highest quality and lowest quality stocks as defined by four key factors: 1) Relative Value; 2) Operating Momentum; 3) Analyst Revision Momentum; and 4) Fundamental Quality.  At the end of each month, we take roughly 1/3 of the stocks on this list to construct our various long/short and long-only model portfolios based on real trade data.

This systematic approach to uncovering attractive stock ideas has presaged a number of significantly positive sell side ratings changes.  For example, Starbucks Corp. (SBUX) has been listed as a high-quality in our weekly ranking report since November 12, and T. Rowe Price (TROW) has been in our model portfolios since November 30 — both were both placed on Goldman Sach's Conviction Buy List last week.  (For additional examples, see this earlier article on Seeking Alpha.)

This week, 67 stocks make the “high-quality” list versus 63 last week, with 7 additions and 3 deletions.  33 stocks make the “low-quality” list, up from 32 last week, with 6 additions and 3 deletions.  The most interesting “high-quality” long idea this week is Lam Research Corporation (LRCX).

Lam Research Corporation (LRCX)
This company is a $6.4b market cap semiconductor equipment company based in Fremont, California. Similar to Varian Semiconductor (VSEA), which is another attractive semiconductor stock, LRCX designs, manufactures and markets semiconductor processing equipment used in the fabrication of integrated circuits.  LRCX looks like the better relative idea, trading at 9.7x CY2011E EPS versus 12x for VSEA, and with stronger ROIC prospects as it relates to relative levels and growth prospects.  Like VSEA, it recently experienced a big upgrade in consensus EPS while revenue remained roughly unchanged.  We do not have many Technology sector names on our lists, but these two stocks look attractive now and have the potential to further leverage operating efficiencies once industry fundamentals are able to support higher levels of revenue growth.  LRCX has been on our “high-quality” list for several weeks now, but just recently achieved scores of 5 in our four key factors that we focus on.

Currently 11 sell side analysts have an average $49 stock price target for the stock, ranging from $32 to $68.  $68 looks achievable to us  – it represents a recent high of 9.1x LTM EBITDA applied to an implied LTM EBITDA estimate of $7.50/share two quarters out.  Since recent volatility has been running close to 9%/month, some ratio relative to this figure could support a reasonable short-term price target and stop loss.