The semiconductor industry has had a rough ride over the past year, and some of the companies more leveraged to personal computer sales suffered the most, while the radio frequency leaders fared somewhat better. Typically when the chip stocks suffer, so do the semiconductor capital equipment stocks. One firm on Wall Street thinks that momentum at the foundries could be building and the rest of 2016 could perk up.

A new research report from Stifel cites the momentum at the foundries as a positive that could start to drive estimates for the top stocks higher. The Stifel team also thinks that front- and back-end trends and outlooks are tracking ahead of expectations that were set at the beginning of 2016. Toss in a pickup in smartphone demand in China, and the positives may continue to build.

The Stifel report includes six companies rated Buy, but here we focus on three of the biggest players.

Applied Materials

This is a semiconductor capital equipment leader that has lagged the overall tech market over the past year, but its shares have bounced smartly off lows printed in February and back in December. Applied Materials Inc. (NASDAQ: AMAT) is actually now finally trading above all the moving averages, and for patient investors 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.

Despite the rough patch the company has hit, many on Wall Street think that films companies like Applied Materials will benefit from the new Intel and Micron Technology 3D XPoint (which is pronounced 3D cross-point) technology, which is an entirely new class of nonvolatile memory that can help turn immense amounts of data into valuable information in real time. The Stifel team points out that while the stock is up 13%, it was down a horrible 25% last year.

Applied Material’s revenues and orders in China continue to grow, as both local manufacturers as well as multinational customers expand their footprints. In the recently reported first-quarter fiscal 2016 results, total sales in China were $497 million, up 21.2% year over year, while orders surged 56.1% to $462 million. The company is also set to spend $615 million to expand there over the next few years.

Applied Materials investors are paid a 1.9% dividend. The RBC price target for the stock is $24, and the Thomson/First Call consensus price target is at $22.55. The stock closed most recently at $20.95 per share.

Lam Research

This company remains one of the top chip equipment picks across Wall Street. 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 wafer fab equipment (WFE) market, driven by a strong focus on technology inflection spending over the next few years.
Despite so-so foundry and logic spending in 2015, many on Wall Street think that Lam Research also will continue to benefit from technology transitions such as FinFET, 3D NAND, multi patterning and advanced packaging in 2015 and beyond. Many analysts believe it is the “cleanest” semi cap story benefiting from cyclical tailwind, SAM expansion and share gains.

The company announced last month it had been recognized as one of 26 companies receiving Intel’s Preferred Quality Supplier award for its performance in 2015. Lam Research has demonstrated industry-leading commitment across all critical focus areas on which it is measured: quality, cost, availability, technology, customer service, labor, and ethics systems and environmental sustainability.

Lam Research investors are paid a 1.47% dividend. Stifel has a $93 price target on the stock, while the consensus target is posted at $92.17. Shares closed on Tuesday at $81.69 apiece.

MKS Instruments

This is a company that flies somewhat under the radar, but it offers solid upside. MKS Instruments Inc. (NASDAQ: MKSI) provides instruments, subsystems and process control solutions that measure, control, power, monitor and analyze critical parameters of manufacturing processes in the United States and internationally. The company operates through four segments: Advanced Manufacturing Capital Equipment, Global Service, Asia Region Sales and Other.

MKS offers pressure measurement and control products used for various pressure ranges and accuracies; materials delivery products, including gas flow measurement products and vacuum valves; automation and control products, such as automation platforms, programmable automation controllers, temperature controllers and software solutions for use in automation, I/O and distributed programmable I/O, gateways and connectivity products; and vacuum products comprising vacuum containment components, effluent management subsystems and custom stainless steel chambers, vessels and pharmaceutical process equipment hardware and housings.

The company recently announced that it will pay $980 million, or $23.00 per share, in cash to acquire Newport. The company plans on financing the acquisition through cash on hand and up to $800 million in debt. The combined entity also will commit to maintaining a “very strong balance sheet” with a combined pro forma net cash and investments on hand of approximately $425 million.

“The combination of MKS Instruments and Newport Corporation creates a premier supplier of critical components and subsystems for a diverse set of growing end markets, each with a common need for highly precise technology enabling solutions,” said Gerald Colella, MKS Instruments’ chief executive officer and president.

MKS shareholders receive a 1.81% dividend. The Stifel price target is posted at $43, and the consensus price objective is $40.40. Shares closed most recently at $37.54.

While these stocks are much more suited for aggressive accounts, you do have two industry leaders and another big player. With earnings coming, investors may want to buy some stock and keep some dry powder to see how the first quarter went, as this may be more of a second-half story.

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