The Top 10 Semiconductor Equipment Stocks of 2010

It's been a pretty kind year to stock investors, with the S&P showing a 12.5% gain in 2010. Of course, kindness might still feel relative after a lost decade of negative returns that included the nauseating depths and panic of the financial crisis.

However, while the general market might have edge up at a low double digit pace last year, quite a few stocks poured in monster performances either by riding new trends or by rebounding much stronger than investors expected.

Here's a list of this year's top 10 performers in the semiconductor equipment industry.

Source: Capital IQ, a division of Standard & Poor's. Only includes companies listed on US exchanges that contain a market capitalization greater than $500 million.

Not shockingly, with a rebound in end semiconductor demand, many of the companies that manufacture equipment that assists in the creation of semiconductors also saw steady gains of their own.

While these gains are nothing to sneeze at, they're also well below comparable gains for the top performers making actual semiconductor products. Part of the reasoning for that is that semiconductor equipment stocks typically have some of the best balance sheets around. So when early signs were seen in 2009 that the economy was recovering, semiconductor equipment stocks broadly recovered at the tail end of last year. Investors looked at their cash-heavy balance sheets and realized they'd be able to easily recover from the storm.

For example, look at this chart that shows what percent each of these companies keeps as a percentage of its market cap.

Source: Capital IQ, a division of Standard & Poor's. Asterisk indicates company also keeps some level of debt. No company listed keeps more than 6% of market cap value in debt.

As a comparison, despite all the talk about Apple hoarding cash, the company holds only 9% of its market capitalization in cold hard cash and short-term investments.

So, what's on tap for the semiconductor equipment industry next year? Plenty of attention has been paid to companies creating equipment for booming end industries like smartphones and tablets. Take Lam Research, for example. The company makes it on the top performer list largely thanks to its position in the Flash memory end market, which is expected to see continuing growth into the next year. Veeco has benefited from its focus on the booming LED end market.

However, with several turnaround stories still in progress within the industry, I wouldn't be surprised to see a couple of underperformers from 2010 make next year's list of top performers. Take FormFactor (Nasdaq: FORM) for example. The company expanded across too many products and entered into pricing wars across these new lines. However, new management has since refocused the company. With 82% of its market capitalization in cash, if the company shows continuing progress in its march back to profitability, it should show outsized returns for investors.

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