Stocks Fools Love
February 11, 1998

Applied Materials
by Erik Rydholm (TMF Fletch)

Applied Materials (Nasdaq: AMAT)
3050 Bowers Ave.
Santa Clara, CA 95054-3299
http://www.appliedmaterials.com
$34 3/4 as of February 9, 1998

In the Fool's new book You Have More Than You Think, David and Tom Gardner plead with readers to find great stocks sitting right under our noses -- big consumer-oriented companies whose products we use and love. The biggest investment mistake you can make, they say, is buying stocks that you don't understand.

"Buying what you don't know, what you aren't, is like putting the apple on your head for the rookie knife thrower twenty yards away."

Which brings us rather uncomfortably to Applied Materials, the company that manufactures wafer fabrication systems for the semiconductor industry and puts out press releases that read like wartime code -- "Ultima HDP-CVDTM Centura (R) Enables Shallow Trench Isolation and Intermetal Dielectric Applications for 0.35µm Devices!"

I'm not a betting man, but I'd be willing to wager a grand sum that you don't have a wafer fabrication system in your basement. It's not the sort of thing you pick up at Home Depot during your Sunday errands.

You can, however, see wafer fabrication systems at work in your home on Sunday. Simply flip on the tube and watch one of those Intel commercials. Those guys in the glitzy bunny suits are making chips with wafer fabrication systems. For some online product pictures, take a journey through Applied Materials' website.

Done?

Okay, now you know exactly as much about wafer fabrication systems as I do. That's not usually the sign of a Foolish investment. Quoting again from You Have More Than You Think:

"The greatest blunders we make as investors occur when we try to reach at ideas that sit outside our circle of expertise."

But hey, Tom and David actually selected this stock for the Fool Portfolio back in January of 1995, and they didn't know much more about it. Here's what they had to say at the time:

"So why are we buying it? We don't have fingers enough to count the reasons."

They then went on to list expanding markets, upgraded earnings estimates, strong past performance, top industry ranking, terrific management, inspiring PEG, fast business growth, and prime global positioning among the litany of reasons.

Fourteen months later, the Fool sold at a loss.

"The prominent reason that we lost money in this particular case is probably that we bought a great company at the WORST point. Semiconductor equipment is a cyclical growth industry... that is, it rises strongly over time, but in a much less linear manner than traditional growth companies."

In other words, Applied rose fast but fell hard, along with the entire industry. Shortly after the Fool sold, Applied turned around and soared to new highs, along with the entire industry. In October, it got nailed again, along with the entire industry. Recently, it has turned around once more, along with the entire industry. Notice a trend here?

Okay, there are some reasons to look at Applied besides the fact that it appears that the surf is up on the Fletchian Benevolent Market Timing/Value Turnaround Wave Indicator (FBMT/VTWI [TM]). First, I'm assured by nearly everyone I ask that it's an incredibly well-run company. Dale Wettlaufer, our news shaman, goes further, calling Applied "the class of its industry." The message boards are littered with terms like "sparkling balance sheet" and "powerhouse." But does that matter? I once again consult the new Motley tome...

"Don't rush to act quickly on the recommendations of others. And by 'others,' we mean anybody or anything: a full-service broker, an online investor, your magic eight ball, your great-aunt Leona in the middle of her hot streak, or the CEO of the company in which you plan to invest."

Sheesh. I'll admit that there are some things to worry about here. Applied does do quite a bit of business over in Asia. The book again...

"Any investment in something that you don't understand is a mistake even if it beats the market for you."

Which is exactly what Applied has done since I bought it at $29 for my own portfolio back in mid-December. Flipping frantically through the pages of You Have More Than You Think for any sort of reassurance, I come up empty. Scolds, taunts, and warnings on every page. Until I close my book. The last line on the back cover -- praise from the Cincinnati Enquirer:

"Followers of The Motley Fool... can learn much about investing and maybe more about disrespecting authority."

That's it! Forget Tom and Dave! I'm trusting my gut. Who said love had to be rational?

Next Stock Fools Love: Autodesk

* A Stock to Love represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.