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Favorite Stock: KLA-Tencor
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December 4, 2001: 10:55 a.m. ET
Strategist likes chip-equipment maker's cyclical position, growth prospects.
By Andrew Stein
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NEW YORK (CNN/Money) - At first glance, the recent climb in the tech sector leaves some chip stocks looking overpriced, says Francois Trahan, equity strategist with Brown Brothers Harriman, but that's the beginning of the cycle for his favorite stock, KLA-Tencor.
"Don't be frightened by valuations," said Trahan. "The market anticipates recovery in earnings by about nine months, and we're in that range now, so many tech stocks look overpriced."
In the week following the Sept. 11 attacks, the Philadelphia Stock Exchange's Semiconductor index (Soxx) dropped to 343.93, and it has climbed more than 60 percent during the recent rally.
KLA-Tencor shares have risen in tandem with the Soxx, climbing to more than $50 from just below $30 in the week after the attacks.
The rise in stock prices leaves many chip-equipment companies with inflated price-to-earnings ratios, but these will become more reasonable when equipment orders pick up, says Trahan.
"This scenario suggests that investors should increasingly emphasize three characteristics when choosing stocks: cyclical patterns, large-cap biases, and growth potential," he said.
Trahan explains how KLAC-Tencor (KLAC: up $1.59 to $51.52, Research, Estimates) fits into these characteristics.
What are some of the indications orders in the chip sector are going to pick up?
There have been a number of supportive developments for the semiconductor-related segment in the recent weeks.
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Brown Brothers Harriman's Trahan says KLA-Tencor will continue to grow. | |
Semiconductor inventories have been shed at a rapid pace, down 2.1 percent in October.
New orders for semiconductors in October lost downside momentum for a third consecutive month.
The Semiconductor Industry Association expects the fourth quarter to deliver positive sequential revenue growth.
A number of companies, such as Intel (INTC: up $0.05 to $32.09, Research, Estimates), have reaffirmed their earnings outlook for the current quarter.
When do you expect the earnings for chip-related companies to recover?
Earnings usually follow stock prices by about nine months, so we expect a recovery in the first quarter of 2002, but I don't make a big point with that. It could be closer to the middle of the year.
There have been some executives selling the stock and exercising options recently. Should there be any concern with that?
Over time, we've found that insider activity is not a good indicator of stock or company performance. Employees will sell stock for a number of different reasons, like buying a house, for example.
Why KLA-Tencor, and not another company in the chip-equipment sector, particularly Applied Materials?
Applied is in a very similar situation and it will also benefit from the recovery. It is an early cyclical, a large-cap firm, and a growth stock. We like KLA-Tencor because the valuations are a little better than Applied Materials (AMAT: up $1.60 to $40.87, Research, Estimates).
Shares of KLA-Tencor have gained about $20 after Sept. 11. Are they running out of steam?
I think a lot of the rally was just getting back to pre-attack levels, and I don't put too much emphasis on how much it has gone up. The earnings cycle usually lasts one-and-a-half years, so there is still plenty of steam left.
Do you have any financial interest in the stock?
No, I do not own it personally, nor does the firm have a position, but it is on our watch list. 
* Disclaimer
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