Stock expecting a whopping 23%…

Robo Street – January 25, 2018

Fourth Quarter Earnings Season Coming Up Roses

The major indices once again set new all-time highs this week, and stocks are enjoying a historic winning streak fueled by solid earnings from market leading stocks, the perceived benefits of tax reform and FOMO (Fear Of Missing Out). The S&P 500 has now appreciated in 12 of the last 15 trading days and, after blasting through the 2,800-level last week, the index is now sitting at 2,839. The Nasdaq is approaching the 7,500 level quickly, as the tech-heavy index is on a torrid run. The Russell 2000 small-caps are also participating in the rally, as they made a nice push to new highs above the 1,600 level on Monday.

However, the S&P 500 Volatility Index (VIX) has also been rising, which is slightly worrisome. The VIX spiked to a peak of 11.88 yesterday. While it is off its highs of around 12.50 from last week, the VIX held above both its 50- and 200-day moving averages yesterday, so I’m still slightly cautious at this point and any negative headline of significance could trigger some well-deserved profit taking.

Elsewhere in the market, crude oil is continuing its advance after breaking through the $60-per-barrel level at the start of the year. The price is now sitting just above the $66 level despite a report from the American Petroleum Institute (API) this week that showed supplies of crude oil in the U.S. rose by 2.8 million barrels last week versus an expected drawdown of 1.6 million barrels. The weakness in the U.S. dollar, geopolitical tensions and a more disciplined OPEC have contributed to the rise in oil prices lately.

As of this week, more than three-quarters of the S&P 500 companies that reported so far have topped earnings estimates. Fourth-quarter reports will also have the first guidance on the potential effects of the tax cuts passed by Republicans. It’s still early in the earnings season, but sales pipeline projections for Q1 are showing an improvement.

For Wall Street, forward guidance is critical as the market looks ahead to 2018 earnings and the effects of the tax bill. Stocks have been rallying since mid-December on expectations of a flow-through of tax benefits, which will not be fully understood for a while. However, the most recent data suggest that corporate revenue and earnings will top most investors’ expectations.

Here are further signs to support a bullish view of Q4 results and Q1 guidance:

• The US Citi Economic Surprise Index, a measure of economic data relative to expectations, concurs. It is near record highs.
• As discussed earlier, manufacturing has been the strongest in a dozen years and is historically well correlated with earnings growth.
• Weakness in the US dollar boosts overseas earnings for US-based multinationals and may present a tailwind for Q4 earnings.
• Fewer negative profit warnings tend to lead to better-than-expected earnings results.

The current mix of healthy economic growth, tame inflation, low interest rates and business-friendly tax cuts serves investors well in a stock market environment that is relatively expensive, but not in bubble territory. If we pick up signals of slowing growth or a quickening of inflation and/or rising rates, then it would prove prudent to tighten trailing stops or just take profits outright. Until then, the trend is out best friend.

One of the quintessential spaces within the broader tech sector that has an incredibly promising future is the semiconductor equipment companies. They provide the fabrication equipment for all the chipmakers that are racing to bring first-to-market semiconductors that serve all the various markets that are undergoing transformational change. Whether its desktop/mobile computing, smartphones, data center/cloud computing, artificial intelligence (AI), augmented reality (AR), Internet of Things (IoT), Virtual Reality (VR), Autonomous Driving, Advanced Robotics, Machine Learning, 5G Wireless, Mobile Gaming, Silicon Photonics, Big Data and Organic Light-Emitting Diode (OLED), they all use specialized chips to operate on. And all those chips are made with chip equipment.

Enter Applied Materials (AMAT) – it is the biggest by sales and arguably the best positioned of all the major chip-equipment makers of which the field is remarkably small. For 2016, the total sales for the sector was $31.8 billion, of which the top ten companies accounted for $26 billion- or 82%- of total global revenues.

Shares of AMAT trade at a very low multiple of forward earnings because their business has historically been cyclical as the demand for technology-driven products has been inconsistent and trend-driven. This risk is now well mitigated by a diversified set of demand drivers within their business and a much longer-term trend in technology adoption. Additionally, tax reform will encourage businesses to make investments in improving their technological infrastructure, which will drive growth in Applied Materials’ largest business sectors.

My AI-driven analysis is forecasting nothing short of a robust next six months for Applied Materials. In a market where investors are searching hard for high growth, low volatility at a reasonable price, they need not look any further than the AMAT. The stock doubled in value in the past 18 months and has been consolidating those gains during the month of January, but doing so near its all-time high of $60.89.

Currently trading at just under $57, the company will report Q4 2017 earnings on February 21. According to Zacks Investment Research, based on 9 analysts’ forecasts, the consensus EPS forecast for the quarter is $0.97. The reported EPS for the same quarter last year was $0.67. This would represent year-over-year earnings growth of 44%. For 2018, the analyst community is looking for the company to earn $4.10-$4.40 per share.

Any time you can buy 44% annual growth trading at a forward PE of 13x, you have a serious investment proposition to consider. While many stocks are technically extended, shares of AMAT sitting just above the 20-day and 50-day moving averages and registering positive money flow. My Stock Forecast Toolbox is predicting a move to $66 in a flat world. The stock could easily clear $70 if the rally maintains its primary uptrend, a view that I view as being supported by economic fundamentals. If my machines are correct, and they are 80% of the time, we can look forward to AMAT adding 23% to its current stock valuation over the next few months. That’s pretty mouth-watering.

So just when the media is screaming about stocks having reached “bubble” valuations, this is simply not the case. It’s still winter and there are many great stocks like Applied Materials that will be coming up roses throughout the spring season and beyond. It just takes a quantifiable system to recognize those special stocks that have a terrific six-month outlook. To that point, Tradesppon has the system and the best picks for 2018.