Lam Research Corp. (LRCX) is one of the best run companies in the United States. In my newsletter, I refer to Lam as "Kirk's ATM Machine" due to how well I've done over the past twelve years using its volatility to make a lot of money. Lam makes machines that etch patterns into semiconductor wafers. As semiconductor chips got more complex, more layers of metal are required for interconnecting the billions of transistors. Each layer requires two etch steps, one to etch the pattern of “wires” and another to etch holes to connect the just etched interconnect layer with the previous layer of circuitry. To me, it was clear when I first added LRCX (LRCX Charts) to my newsletter portfolio back in 1998 (at $3.33 per split adjusted share) that one of the largest growth areas in semiconductor capital equipment tools would be tools to etch all these layers as chip complexity grew.
In April, Lam announced it earned $120.3M (94¢ per share) on revenue of $632.8M. 19¢ of every revenue dollar was profit! Their shipments for the March 2010 quarter reached an all-time high reflecting market share gains in both their etch and clean businesses.
Fortunately, I took profits in my newsletter explore portfolio during that April; 100 shares at $38.31 and 200 more shares at $42.50 as LRCX surged into this great news. Lam had grown to over 10% of my explore portfolio, so I sold 300 shares or (300/1,150x100%) 26% of my position. I also sold some in my personal account.
LRCX did not fall enough on the March 6 "panic day" to hit my auto buy level target, so I made note of its intraday low for future reference. Yesterday the market fell to test its March 6 low with the S&P500 dropping below its 200 day-moving-average. Lam also fell but did not go below its March 6 intraday low and found support just above its 200 DMA at $35.69. I saw this as a positive sign, so I bought back 100 shares at $37.00 Thursday morning (May 20, 2010.)
Not only did LAM find support just above its 200-DMA but this price is also right at the dashed green support line I drew on the chart last month and show on a new and expanded chart below.
click image for full size graph courtesy of stockcharts.com
It is IMPOSSIBLE to use fundamentals (shown below) to call tops and bottoms for LRCX or most other stocks in the semiconductor capital equipment sector such as Applied Materials (AMAT), Novellus (NVLS) and Ultratech (UTEK). These stocks usually peak when they look very undervalued with PEGs often well below 1.0 while they bottom when fundamentals look terrible and they are losing money. With that said, if the economy continues to grow as ECRI predicts, then buying now should be rewarding in the future, especially if you sell the shares before the next market top.
Fundamentals with LRCX at $37.00 :
Click table for full size
Net Cash / share
The stock market came a long way very quickly but nowhere near as fast, as we saw in 1999. I have learned over the years to take profits on the way up as you NEVER know when a final top will come. Often if you take profits at the right time, as I get better and better at predicting, you make extra money buying back shares when they correct.
My guess is LRCX could see $60s to $90s if the bull market lasts another year and the small investors return to the market. The only complaint I have for Lam is that it does not pay a dividend. The way to “extract value” over time with Lam is to trade the volatility to take cash out and pay our own dividends or buy when very cheap and ride out the volatility. I do a bit of both.
Disclosure: After gaining 84% for my portfolio in 2009, Lam is my top holding now at 8.7% of my newsletter explore portfolio after taking profits when it was over 10% and buying back shares today. As of 5/20/10 My newsletter "Explore" portfolio hold 950 shares "on house money" plus $124,678 in cash gains generated from buying and selling LRCX since buying my first 2,000 shares shares at $10.00 (or 6,000 shares at a split adjusted $3.33) on 9/30/98. I have had similar results with my personal portfolio.
Before you consider buying, be prepared for volatility. As charts of LRCX here show, LRCX was under $10 in 2002 and just over $60 in 2007. There is great opportunity to make a lot of money with Lam, but you can lose a lot if you panic and sell at the wrong times too.