The chip business is a volatile and inventory sensitive sector, and this includes the semiconductor capital equipment and materials stocks. They tend to be driven up or down by the stop-and-start nature of the chip industry. In a new report from UBS A.G. (NYSE: UBS), analysts focus on the prospects for the semiconductor capital equipment sector for the second half of 2013. They expect second half of the year sales to be up 5% to 10% over the first half. They also believe the timing and the depth of foundry weakness likely takes center stage in the second half of the year.

UBS sees the setup feeling very similar to 2011, when foundry orders paused in mid-year. Chip sizing issues were worked out and followed by a big spike in the fourth quarter. The team now expects the near-term foundry order pause to be temporary and likely to recover in the third quarter this year. By sizing up inventory levels and looking at channel check, these are the UBS semiconductor capital equipment and materials stocks to buy now.

KLA-Tencor Corp. (NASDAQ: KLAC) is expected to benefit from stronger 2013 spending. The UBS price target for this sector leader is $58. The Thomson/First Call estimate is higher at $60. Investors receive a tidy 2.90% dividend.

ASML Holding N.V. (NASDAQ: ASML) is a top European stock to buy. The company specializes in designing, manufacturing, marketing and servicing semiconductor processing equipment used in the fabrication of integrated circuits or chips worldwide. UBS has a currency adjusted target of $81.90. The consensus for the stock is $78.50. Investors receive a small 0.80% dividend.

Lam Research Corp. (NASDAQ: LRCX) is currently trading at 52-week highs. The company designs, manufactures, markets, refurbishes and services semiconductor processing equipment used in the fabrication of microchips. UBS has a $52 price target, and the consensus target for the stock is also $52.

Teradyne Inc. (NYSE: TER) makes the list of stock to buy. It is a maker of automatic test equipment, and the stock rose last week on unusually high volume. The UBS price objective is $25. The consensus target for the stock is much lower at $20.

Photronics Inc. (NASDAQ: PLAB) is a top small-cap name to buy from UBS. The company is well positioned to capitalize on high-end growth over the next few years. UBS has an $8.50 target for the stock, but the consensus is even higher at $9.

MEMC Electronic Materials Inc. (NYSE: WFR) rounds out the list of stocks to buy and was just featured in our own 2013 versus the 2007-2008 solar energy bubble. This former high-flyer traded in the mid-70s back in 2008. It broke a double top at $5.75 and has pushed higher ever since. UBS only has a $5.75 target, which it may have to revise. The consensus is at $6.

UBS advises that if end market demand falters, equipment orders could begin to decline this year and beyond, which could lead to lower-than-expected semiconductor capital equipment sales. In addition, overcapacity and oversupply, for example, of memory chips (DRAM) can hurt semiconductor companies’ profitability and their ability to make further investments in capital equipment, which also can result in a new down cycle. If orders stay strong, investors may realize some solid gains over the second half of the year.

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