Next week in San Francisco is the largest semiconductor capital equipment trade show, called SEMICON West. All the players are there, and positive announcements can have a huge impact on stock prices. A new report from Merrill Lynch says the main focus will be on SPE (semiconductor production equipment) industry shipments, technology trends and wafer fab equipment (WFE) outlook for the rest of this year and 2016.

While tool shipments are expected to decline, the Merrill Lynch team believes that company management will be positive on the forward outlook due to 3D NAND and FinFET/10 nanometer activity at logic and foundry customers.

The distinguishing characteristic of the FinFET is that the conducting channel is wrapped by a thin silicon “fin,” which forms the body of the device. This is the next wave and is expected to be huge. New FinFET technology design chips are the breakthrough that could be monumental for the leaders in the field and those producing them. Some believe the FinFET transistor structure promises to rejuvenate the chip industry by rescuing it from the short-channel effects that limit device scalability faced by current planar transistor structure.

The analysts are very positive on three stocks rated Buy going into the show.

ALSO READ: 3 Chip Stocks That Could Be the Next Sector Victims

Applied Materials

This semiconductor capital equipment leader has lagged the overall tech market over the past year. Applied Materials Inc. (NASDAQ: AMAT) is actually now trading below all the moving averages, and for patient investors it may be a high-quality pick now. The company is the global leader in precision materials engineering solutions for the semiconductor, flat panel display and solar photovoltaic industries. Applied Material’s technologies help make innovations like smartphones, flat screen TVs and solar panels more affordable and accessible to consumers and businesses around the world.

The analysts are very positive on the stock and see Applied Materials benefiting not only the semiconductor side of the business, but also from larger, higher resolution and flexible screens on the display side of the business. Many on Wall Street were disappointed when the merger with Tokyo Electron was called off recently, and the Merrill Lynch team points out the stocks has been out of favor ever since.

Despite reporting solid first-quarter earnings that were above consensus and giving guidance that was in line with expectations, the stock has continued to underperform. It may very well be one of the best technology values available for investors today. Some Wall Street analysts see continued FinFET capacity expansion (10nm/14nm/16nm) and transition to 3D NAND, with DRAM spending remaining strong next year.

The Merrill Lynch analysts point to the analyst day at SEMICON West and commentary from peers on the robust chip cycle as upcoming catalysts.

Applied Materials Investors are paid a 2.15% dividend. The Merrill Lynch price target for the stock is $26. The Thomson/First Call consensus price target is $24.50. Applied closed Thursday at $18.52.

ALSO READ: Deutsche Bank’s 3 Top Networking Stocks to Buy Now
KLA-Tencor

This company is a technology leader in the design, manufacture and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries. KLA-Tencor Corp.’s (NASDAQ: KLAC) industry leading technologies serve the semiconductor, LED and other related nanoelectronics industries. KLA-Tencor has a portfolio of industry-standard products and a team of world-class engineers and scientists.

The company also posted solid results for the first quarter. The analysts feel many of the same fundamentals of 3D NAND and DRAM will benefit orders in the second half of this year, and revenue growth for the company should pick up in 2016. KLA-Tencor also recently announced plans to reduce its workforce by up to 10%, in an effort to streamline operations and to be better aligned with a more concentrated customer base.

The Merrill Lynch team is expecting a June quarter update, but unlike past years, they do not expect the company to announce a dividend increase this year.

KLA-Tencor investors are paid a very solid 3.65% dividend. The Merrill Lynch price target is set at $75. The consensus price target is lower at $65.40. The stock closed Thursday at $54.73.

Lam Research

This is the top chip equipment pick at Merrill Lynch in front of SEMICON West. Lam Research Corp. (NASDAQ: LRCX) designs, manufactures, markets, refurbishes and services semiconductor processing equipment used in the fabrication of integrated circuits. The company offers plasma etch products that remove materials from the wafer to create the features and patterns of a device. Many Wall Street analysts have highlighted the company and its peers as having a significant equipment opportunity from the NAND evolution as well. Lam Research also appears well positioned to gain share in the WFE market, driven by a strong focus on technology inflection spending over the next few years.

Despite so-so foundry and logic spending, many on Wall Street think that Lam Research will continue to benefit also from technology transitions such as FinFET, 3D NAND, multi patterning and advanced packaging in 2015 and beyond. The Merrill Lynch analysts believe it is the “cleanest” semi cap story benefiting from cyclical tailwind, SAM expansion and share gains.

Lam Research investors are paid a 1.54% dividend. The Merrill Lynch price target is $100, and the consensus target is lower at $95.55. The stock closed most recently at $77.63.

ALSO READ: IBM Leads Development of Tiny Chip, but Dumps the Factory to Build It

Clearly new technology will drive spending. These three companies are the undisputed leaders in the sector and all make good sense in an aggressive growth portfolio. Those who are daring may want to buy shares in front of next week’s big show.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.