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Applied Materials sees huge opportunities for added profits

Sun., March 27, 2011, midnight

Everywhere Applied Materials (Nasdaq: AMAT) turns, there’s a growth opportunity. The company supplies materials and equipment for semiconductor manufacturing and solar panels – two red-hot markets in the midst of massive expansion. Applied expects the solar panel market to grow more than 30 percent this year, while wafer equipment spending jumps as much as 15 percent to become a $35 billion market.

In the first quarter of fiscal year 2011, Applied’s sales improved by 45 percent while earnings soared. CEO Michael Splinter credited several factors, including robust demand for smartphones and tablets alongside strong interest in installing solar panels in markets such as Germany, Italy, China and California.

The display segment should be weakening as demand for plain old LCD panels is met by existing manufacturing lines, but Applied also provides equipment for making touch-screen LCD panels and newer OLED displays. That makes Applied Materials a less-expensive alternative play on those trends, in case OLED specialist Universal Display and touch-screen expert Cypress Semiconductor are too rich for your blood.

There’s a lot to like about Applied Materials, particularly if management’s growth projections work out as planned. And there’s no reason why they shouldn’t: Applied has a $3.5 billion order backlog to fall back on. (Universal Display and Cypress Semiconductor are “Motley Fool Rule Breakers” picks.)

Ask the Fool

Q: Some stocks, such as Citigroup and Alcatel-Lucent, have very low current values, yet enjoy high trading volume each day. Who’s buying and selling so many shares of these “penny” stocks that you folks recommend staying away from? – E.M., Walnut Creek, Calif.

A: First off, Citigroup and Alcatel-Lucent have market values around $130 billion and $12 billion, respectively, so they’re not exactly small companies and therefore aren’t classic penny stocks (which tend to trade for less than $5 per share). And after Citigroup executes a planned reverse split, its shares will be above $5, too.

When a stock trades at a very low price, investors sometimes think it’s a bargain, without realizing that a $1 stock can be wildly overvalued and a $300 stock a steal. As some investors lose faith in these firms and sell their shares, others are attracted by the seemingly low price. Meanwhile, even some savvy investors might be buying, if their research suggests that these firms will turn around.

The stock market thrives because there are almost always people willing to buy and sell, at various prices.

Also, remember that the low prices of the shares contribute to the high volume. A $1,000 investment in a $5 stock would create a volume of 200 shares trading hands. However, that same investment in a $50 stock would create volume of just 20 shares.

Q: If my mutual fund closes to new investors, should I worry? – N.P., Lexington, Ky.

A: It’s actually a good sign. Funds are often closed because their managers have more dollars to invest than great investments to park them in. When a fund grows enormous, it gets harder for managers to earn high returns because they have to spread out the money more.

My dumbest investment

My dumbest investment was in Moller International. They make flying cars! I figured everyone would want one, right? – P.K., online

The Fool responds: The company’s description of itself on its website is indeed enticing: “Moller International has developed the first and only feasible, personally affordable, personal vertical takeoff and landing (VTOL) vehicle the world has ever seen.” That kind of thing can get many folks excited enough to invest their hard-earned money.

But stop and ask yourself a few questions: Is the company actually selling these vehicles? Is it earning a profit? Does it have little or manageable debt? Do its trends look good? (For example, are sales and earnings per share rising and its profit margins growing? Are its inventory levels and accounts receivables growing no faster than sales?) Does it have a strong competitive position? Do you have faith in its management? What are its risks? (In this case, a high-profile accident could be big trouble.)

Always look beyond a company’s story for reasons to have long-term confidence. With the stock recently trading for pennies per share, it seems a very risky bet.


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