Deutsche Bank Very Cautious on Semiconductor Equipment: Just 3 Stocks to Buy Now

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Semiconductors and semiconductor capital equipment have always been very cyclical, and while the Philadelphia Semiconductor Index (SOX) is up in line with the S&P 500 this year at about 9%, the semiconductor equipment stocks have significantly underperformed the market — down 11% year to date.

A new Deutsche Bank research report remains very cautious on the bigger, broad-based companies, despite what appears to be interesting entry points for the sector leaders. They continue to prefer companies that have a more defensive business model, or those that look mispriced.

The report noted this in discussing the overall sector health:

We believe investors’ fears will remain as long as the memory market stays weak, and we think the risk is for additional capex push-outs especially in the first half of 2019. While we acknowledge that some capex cuts are already priced in and that stock valuation looks attractive, we also believe the absence of positive catalysts as we continue to search for the bottom of the cycle will likely keep semiconductor capital equipment stocks range-bound in the near term.

Three stocks remain rated Buy, and all three look like solid picks for aggressive growth accounts looking for value.

Entegris

This small-cap play has seen some very solid insider buying over the past year. Entegris Inc. (NASDAQ: ENTG) is a global developer, manufacturer and supplier of micro-contamination control products, specialty chemicals and materials-handling solutions for manufacturing processes in the semiconductor and other high-technology industries.

The analysts remain very positive on the stock and see it as a more defensive play for investors looking to buy the sector but wary of the equipment companies.

The Deutsche Bank price target for the stock is $38, and the Wall Street consensus target is $42.88 The shares closed Tuesday at $28.91.

Ichor

This stock may be off-the-radar for some, but also it could be a beneficiary from the positive news. Ichor Holdings, Ltd. (NASDAQ: ICHR) is engaged in the design, engineering and manufacturing of critical fluid delivery subsystems for semiconductor capital equipment. Its primary offerings include gas and chemical delivery subsystems, collectively known as fluid delivery subsystems, which are key elements of the process tools used in the manufacturing of semiconductor devices.

Ichor’s gas delivery subsystems deliver, monitor and control precise quantities of the specialized gases used in semiconductor manufacturing processes, such as etch and deposition. Its chemical delivery subsystems precisely blend and dispense the reactive liquid chemistries used in semiconductor manufacturing processes, such as chemical-mechanical planarization electroplating and cleaning.

Deutsche Bank has a $32 price target, and the consensus target is $35. The shares closed trading on Tuesday at $20.74.

MKS Instruments

This one flies somewhat lower 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 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.

Many on Wall Street have felt for some time that the increase in the Applied Material display equipment business will have positive implications for MKS as it supplies many key subsystems for Applied Materials display tools. In addition, MKS acquired Newport last year and added the company’s iconic Spectra-Physics laser brand to its product lineup.

MKS shareholders receive a 1% dividend. The $100 Deutsche Bank price target is less than the $124.38 consensus estimate. Shares closed Tuesday at $80.49.

Three outstanding stocks to buy, all of which are way down from 52-week highs. The recent sector volatility is a legitimate concern, so it may make sense to scale-buy shares rather than go all in. With that in mind, it is very possible that by this time next year, some serious money can be made.