What happened
Shares of semiconductor equipment manufacturers Applied Materials (AMAT +0.42%), Lam Research (LRCX +1.83%), and ASML Holdings (ASML +2.05%) all rose materially higher during the month of November, according to data from S&P Global Market Intelligence. Applied Materials was up 39.3%, with Lam Research nearly matching it with 32.3% gains, and ASML logging a respectable 16.6% gain just for good measure.
A highly favorable combination of the same factors sent all three stocks soaring during November.
Images source: Getty Images.
So what
Of the three, only Applied Materials reported earnings in November, with Lam and ASML having reported their September quarter earnings in October. That could explain Applied Materials' outperformance, as Lam and ASML had already logged some impressive gains coming into the month. Applied Materials was also the cheapest of the three on a PE ratio basis heading in.
In its recent quarter, Applied Materials grew revenue an impressive 25.1% over the prior-year quarter, while logging $1.23 in EPS. Both metrics handily beat analyst expectations. The impressive results caused analysts to raise their price targets on the unexpected strength.
AMAT PE Ratio data by YCharts
Analysts shouldn't have really been surprised, however, as Lam and ASML both logged impressive performance during the prior month. The need for leading-edge chips to supply both the global 5G rollout as well as high-performance computing for artificial intelligence applications means the need for more semi equipment machines and services, which is lifting all boats in this cyclical sector.
In addition, the recent U.S. election was perhaps a perfect result for these companies as well. The thinking among investors is that a Biden administration may ease tensions with China, removing some of the trade war headwinds that caused these stocks -- especially Applied and Lam -- to be so cheap in the first place. Yet the fact that the Senate may remain in Republican hands means that a large corporate tax hike is probably off the table. Since these companies are all minting hefty profits, that's another positive as well.
Now what
Even though all three stocks are up so much in recent weeks, their outlook still seems bright for the long-term investor. Leading-edge semiconductor manufacturing is becoming more and more difficult and capital intensive, just as demand for data storage and processing is skyrocketing. So, demand, while somewhat cyclical, should keep rising for these companies over the long-haul. The semiconductor equipment sector is also fairly consolidated, meaning that all these companies have a fair amount of pricing power and stickiness with their customers.
In other words, while there may be a cooling-off period after such a run, long-term investors shouldn't exactly be rushing to sell these high-quality growth names.
