Applied Materials looks like clever investment in 2009

Shares of semiconductor equipment-maker Applied Materials (Nasdaq: AMAT) have been bouncing around lately, even after the company delivered some good news.

At the headline level, you’d be hard-pressed to call the company’s fiscal 2008 anything but a poor performance. Sales plummeted 16 percent for the year. The operating margin shed around 8 percentage points to end at 16.4 percent. And the diluted earnings per share plunged about 42 percent.

But consider this: In the final quarter of Applied Materials’ fiscal year, sales amounted to just $2.04 billion. But the company took in new orders of $2.21 billion. The backlog of work to be done now stands at $4.85 billion – 33 percent higher than at the end of the last fiscal year, implying future sales growth.

Heading into fiscal 2009, Applied Materials’ CEO promised to “implement further cost-reduction actions” that could produce annual savings of as much as $400 million – thus answering the unvoiced rhetorical question: What goes great with better sales? Improved profit margins.

Need we say it? Trading with a price-to-earnings (P/E) ratio of around 12, with analysts predicting 10 percent long-term profit growth over the next half decade and backlog trends supporting these growth predictions, Applied Materials looks cheap. If you’re still skittish, add it to your watch list and consider buying it on a further drop.

Ask the Fool

Q. What’s “forced selling”? – T.W., Panama City, Fla.

A. You’ll hear about forced selling these days because the many big drops in the stock market that we’ve seen recently suggest that it’s going on. Plus, once it starts, it tends to snowball.

Imagine that you own shares of a mutual fund, and it has fallen in value by 30 percent, as has happened with some funds lately. In many cases, it’s best to just hang on, waiting for a recovery – at least as long as you still have faith in the managers. But many shareholders will bail out, in fear or anger. When they do, the managers have to sell off some of the fund’s holdings in order to generate the cash needed for withdrawals. With many funds thus selling lots of stocks, that sends the price of the stocks downward. This then causes more investors to sell, putting further pressure on stocks. Ironically, at a time when many fund managers see bargains galore, they’re forced to sell, not buy.

Meanwhile, other investors, big and small, have bought stocks “on margin,” meaning with borrowed money. If those stocks fall sharply, they need to put in more money, or sell. And many sell, further exacerbating the problem.

Q. Are there some Web sites where I can learn about companies engaging in shenanigans? – K.N., Greensboro, N.C.

A. There sure are. Click over to www.footnoted.org to learn about surprising information buried in financial reports, www.fundalarm.com for mutual fund shenanigans, and www.thecorporatelibrary.com for insights on how well companies govern themselves. Our Fool writers have also been known to uncover some shenanigans – you can check out our recent articles at www.fool.com/foolwatch.

My dumbest investment

In 1984, my wife and I had saved $15,000 and wanted to invest. At a big brokerage, we were mighty impressed with our broker’s three-piece suit and the photo on his desk of his loving wife and children. He convinced us to invest $5,000 in a limited real estate partnership, $5,000 in a gas and oil company, and $5,000 in his company’s aggressive-growth mutual fund. Well, in less than seven years, the first two investments went bankrupt. Imagine if he had just recommended blue-chip stocks. We’ve since invested in Hewlett-Packard and IBM. – Joe Yarborough, Tampa, Fla.

The Fool Responds: Not all brokers are brilliant or are working in your best interest. (Many earn commissions by getting you to invest in this or that, or by getting you to trade frequently.) Many blue chips can be hard to beat. Hewlett-Packard has averaged about 10 percent per year over the past 20 years, and a market-trouncing 3 percent over the past decade. IBM has grown more slowly, but has still grown, beating the market.