This U.S. company will benefit as China tries to catch up in semiconductors

In an attempt to reduce dependence on the U.S., China is likely to ramp up its semiconductor manufacturing and design capabilities. Read More...

Nobody likes the Sword of Damocles hanging over them — certainly not if you are China, the second-largest economy in the world.

Oil used to be the lifeblood of the economy, but no more. The lifeblood of the modern economy is semiconductors. (Please see “Investors are misplacing threats to the U.S. stock market.”)

The U.S. dominates the semiconductor industry, and therefore China is highly dependent on U.S. companies. During the trade war, President Trump effectively used the U.S.’s position in semiconductors as a Sword of Damocles. It is natural for China to try to get out of this situation.

For investors, it is all about making observations, getting ahead of Wall Street and profiting. Which company’s stock will benefit the most as China attempts to reduce the U.S.’s dominance in semiconductors? Let’s explore with the help of a chart.

Read: Taiwan Semi boosted its capex budget — that’s good news for chip stocks

Chart

Please click here for an annotated chart of Applied Materials AMAT, +2.07%.

Note the following:

• Applied Materials is a supplier of equipment for semiconductor manufacturing based in Santa Clara, Calif.

• In its attempt to reduce dependence on the U.S. in semiconductors, China is likely to ramp up its semiconductor manufacturing and design capabilities.

• There is a potential for Applied Materials sales in China to significantly increase over the coming years.

• Applied Materials is in The Arora Report’s model portfolio, bought at $16. It is trading at $62.30 as of this writing.

• The chart shows that Applied Materials stock has been in a steady uptrend.

• The chart shows acceleration in the uptrend.

• The chart shows resistance overhead.

• The pattern that the price is tracing in Applied Materials stock, in the past, has shown a high probability of a breakout above the resistance line shown on the chart.

• The relative strength index (RSI), shown on the chart, indicates that there is room to run up.

• The chart shows that the volume is low. This is a negative.

• In the stock market, Applied Materials has significantly outperformed the Dow Jones Industrial Average DJIA, +0.92%, Nasdaq 100 ETF QQQ, +0.96% and S&P 500 ETF SPY, +0.83%.

• Applied Materials is a 5G stock. (Please see “How and when prudent investors ought to buy these 5G stocks.”)

Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.

How and when to buy

Those who are nimble may want to wait for a breakout above the resistance line shown on the chart and buy into the strength with a tight stop. Since this is a long-term position in The Arora Report’s portfolio, we will likely start a trade-around position for a shorter time frame on a breakout. We will provide a stop zone, target zone and appropriate position size. All investors should use trade-around positions. This technique can often double returns and reduce risks.

For those who are not nimble, it may be prudent to wait for a dip in the Arora buy zone to start a long-term position. Please see “Extreme greed in the stock market is producing a bad setup as earnings season starts.”

More tech stocks

Other semiconductor-manufacturing stocks that may benefit include Lam Research LRCX, +2.55%, KLA Corp. KLAC, +1.68%, Kulicke and Soffa Industries KLIC, +1.88% and ASML Holding ASML, +0.33%. Semiconductor-testing stocks such as Teradyne TER, +1.95% may also benefit.

Here are additional semiconductor stocks in the Arora Report portfolio that will benefit.

• Intel INTC, +1.22%

• Mellanox MLNX, +0.23%. Mellanox is in the process of being bought by Nvidia NVDA, +1.37%.

• Micron Technology MU, +2.69%

• Maxim Integrated Products MXIM, +0.83%

• NXP Semiconductors NXPI, +1.27%

• Qualcomm QCOM, +2.36%

• Qorvo QRVO, +1.16%

• Semiconductor ETF SMH, +1.61%

• Western Digital WDC, +3.00%

• Xilinx (XLNX) XLNX, +2.56%

Among large-cap tech stocks, Apple AAPL, +1.25% is the major beneficiary of the trade deal. Segmented money flows are the best tool to give investors an edge in stocks like Apple. (Please see “Something rare is happening among popular technology stocks.”)

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at [email protected].

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