Can Applied Materials Break Out?

With shares of Applied Materials (NASDAQ:AMAT) trading around $14, is AMAT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Applied Materials provides manufacturing equipment, services, and software to the global semiconductor, flat panel display, solar PV and related industries. Applied’s customers include manufacturers of semiconductor wafers and chips, flat panel LCD displays, solar PV cells and modules, and other electronic devices. These customers may use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. Applied operates in four segments: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. As semiconductor, flat panel, and solar technology sees consistent improvements, companies like Applied Materials will innovate and provide highly demanded products and services.

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T = Technicals on the Stock Chart are Mixed

Applied Materials stock has seen a decline over the last several years. However, it is seeing a strong pop and looks to be headed towards a critical downtrend line where a solid break above would be very positive for the stock. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Applied Materials is trading above its rising key averages which signal neutral to bullish price action in the near-term.

AMAT

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Applied Materials options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Applied Materials Options

24.82%

36%

37%

What does this mean? This means that investors or traders are buying a good amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Flat

Average

July Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a good amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Applied Materials’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Applied Materials look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-27.27%

-66.67%

-222.76%

-52.78%

Revenue Growth (Y-O-Y)

-28.14%

-24.53%

-15.93%

-11.22%

Earnings Reaction

2.04%

0.87%

-1.45%

1.52%

Applied Materials has seen increasing earnings and revenue figures over the last four quarters. From these figures, the markets have been satisfied with Applied Materials’s recent earnings announcements.

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P = Excellent Relative Performance Versus Peers and Sector

How has Applied Materials stock done relative to its peers, KLA-Tencor (NASDAQ:KLAC), Lam Research (NASDAQ:LRCX), Veeco Instruments (NASDAQ:VECO), and sector?

Applied Materials

KLA-Tencor

Lam Research

Veeco Instruments

Sector

Year-to-Date Return

30.42%

16.44%

32.72%

28.25%

25.34%

Applied Materials has been a relative performance leader, year-to-date.

Conclusion

Applied Materials provides valuable products and services to the semiconductor, flat panel display, solar PV, and related industries worldwide. The stock is currently recovering from an overall decline it has seen over the last several years. Earnings and revenue figures have been decreasing, over the last four quarters, which has satisfied investors. Relative to its peers and sector, Applied Materials has been a year-to-date performance leader. WAIT AND SEE what Applied Materials does this coming quarter.

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