Portfolio Update: Exiting Some Names (FANG, ABBV); Initiating a New Position (AMAT) 

12 Oct 2021 _ 3:50 PM EDT

We would like to provide some updates regarding our portfolio.

Selling some names

Yesterday we sold our final pieces of Diamondback Energy (FANG), realizing an average of 25% gain in this position (made multiple sells throughout the ride up). We initiated this position on the tailwind of rising oil prices, and it is only responsible to realize such gains.

We also got rid of Abbvie at breakeven. There is nothing wrong with this stock in the long run, but we find our capital would be better allocated elsewhere.

Buying a new name

Using the capital acquired from selling, we're initiating a new position in Applied Materials (AMAT) here at $126 with a $160 price target and a "One" rating. 

We believe the need for incremental semiconductor manufacturing capacity is a very strong investment thesis. We know the road to autonomous vehicles means autos will essentially become a "data center on wheels" thereby continuing to increase the semiconductor content per vehicle in the coming years. In addition to autos, the opportunities exist in other sectors such as 5G, big data, AI, AR/VR, data center expansion, all of which will drive continued demand for semiconductors in the coming years. 

We remain in a demand upcycle for semiconductor capital equipment. SEMI, the semiconductor capital equipment trade association, now sees global sales of semiconductor manufacturing equipment by original equipment manufacturers passing the $100 billion mark in 2022, after jumping 34% to $95.3 billion in 2021 and registering $71.1 billion in 2020. Other forecasts point to continued growth in the semiconductor capital equipment market due to the maturing of the 5G and IoT markets as well as the maturation of the other drivers for chip demand mentioned above. At a somewhat simplistic level, if chips are increasingly the fabric of our increasingly digital lives, we want to own the company that builds the machines that make the chips. 

One of the reasons for the addition of AMAT shares is as much the long-term opportunity outlined above, but also the recent selloff over the last few weeks which sweetens the long-term risk/reward dynamics. That recent pressure on the shares stemmed from investors looking to lock in gains in AMAT shares given their substantial move over the last year. Additionally, we believe there are shortsighted views that the current upcycle in semiconductor demand will end soon. While we can't fault folks for locking in outsized gains, we will take advantage of those not recognizing the long-term drivers at hand. 

We also like the company's policy of returning capital to shareholders and would note its growing track record of annual dividend increases. AMAT's next $0.24 per share quarterly dividend will be paid Dec. 16 to shareholders of record Nov. 26 and compares to the $0.10 per share quarterly dividend paid in late 2017. 

In terms of our price target, it's a smidge below the Wall Street consensus of $162.70. On a P/E basis, the shares are currently trading at 16.2x consensus calendar EPS expectations of $7.81 and the shares have peaked at an average P/E of 21 during a period of upcycling demand like they are currently in. Our $160 target equates to a modest discount to the historical peak P/E figure. 

The Technical Take on AMAT Shares

It's hard to find a more consistent pattern of back/forth than what we see with Applied Materials. The big semi equipment company is back in the bottom of a trading range that it has been in since April. Note the previous 2-3 times that AMAT touches the black line, it launches upward. Further, the stock has now tested the 200 MA (red), which in the past has been a good area of support (it's been a while, though). Recent volume trends are slight as the stock has consolidated in this 125-128 area.

At the very least, if this stock can get to the top of the box range we are looking at a move to 145 or so, perhaps a 15% rise up from current prices. Note that other indicators are not flashing buy signals, so we'll add this one with a bit of caution. The RSI seems to have hit an area where the stock has bounced before.