Why downgrade equipment stocks?

Based on “worries about an economic slowdown and the commoditization of semiconductors,” MarketWatch reported yesterday that Lehman Brothers has downgraded semiconductor manufacturing equipment makers Applied Materials, KLA-Tencor and Novellus Systems.

Applied and KLA-Tencor were downgraded from overweight to equal-weight, while Novellus fared the worst: Lehman analyst C.J. Muse cut the company’s rating from equal-weight to underweight, and said in his report that he sees, “no compelling reason to own [the] shares.” 

Wow, that’s harsh.

The trouble with reading these reports in the first place is seeing how shortsighted they are. The equipment industry grew at a whopping 23 percent last year, and this is a cyclical industry, remember? It is short-sighted to look merely at consensus estimates from Wall Street to decide whether to own the stock. These companies are making it possible to achieve technology advances.

Take for example Intel. The microprocessor giant does not make its own equipment, rather, it has – and has always had – very close partnerships with the equipment makers. Therefore, no matter what a financial analyst says about the stock, the companies aren’t going anywhere anytime soon. 

And actually considering the long-term history of the stock, if you take Novellus, for example, the stock is performing on a relatively stable basis. According to Yahoo Finance, the 52-week average for the company’s stock is $25.50 to $35. At this writing, the stock was trading at $27.43. I guess if you are a daytrader, the five day average is not so attractive, but for the rest of the world, equipment stocks are a good investment over the long haul.

–Ann Steffora Mutschler, Senior Editor