Part 6

Applied Materials (AMAT)

Company Background

Applied Materials, Inc. is an American corporation founded back in 1967, that supplies equipment, services and software for the manufacture of semiconductor (integrated circuit) chips for electronics, flat panel displays for computers, smartphones and televisions, and solar products. The company also supplies equipment to produce coatings for flexible electronics, packaging and other applications. The company is headquartered in Santa Clara, California, in Silicon Valley. Applied Materials is the leader in materials engineering solutions used to produce virtually every new chip and advanced display in the world. They specialize in modifying materials at atomic levels and on an industrial scale, which enables customers to transform possibilities into reality. Applied Materials is at the forefront of the 4th industrial revolution and its technology plays a key role in shaping the future. The company has more than 24,000 employees across its 110 locations in 19 countries.

Current position – Financial Performance and Future Growth Prospects

Technology continues to become an even more important part of our lives by the day with the increased demand and global spending on things like 5G, IoT, Renewable Energy, Automation, Artificial Intelligence, Virtual Reality, Augmented Reality etc. which in turn creates an extremely favorable environment for companies like Applied Materials to continue to grow at a tremendous rate in the years to come. The company is uniquely positioned to be one of the fastest growing companies in the space due to the nature of its business model as it does not build the semiconductor chips by itself, but rather supplies equipment, services and software to all of the chip manufacturers out there. This allows Applied Materials to stay away from the constant “wars” between all of the chip manufacturers out there as to who’s going to bring the newer model first, how efficient is it going to be etc. In fact, the stiff competition in the Semiconductor space serves as a great growth driver for Applied Materials as by basically being the supplier of all parties involved the company reaps tremendous benefits and continues to grow.

The company is the number one equipment supplier to the global semiconductor industry. Applied Materials has been the industry leader for over twenty years, and is strongly positioned in the industry. Furthermore, the company has seen the positive impact of a solid demand for silicon in several applications across various markets. Additionally, growing momentum among long-term service agreements is contributing well. The increased customer spending in foundry and logic on the back of rising need for specialty nodes in automotive, power, 5G rollout, IoT, communications and image sensor markets, is also a major positive. Also, strong momentum in conductor etches is benefiting the company’s position in DRAM and NAND. Notably, the stock has outperformed the industry it belongs to over a year.

Last but not least, Applied Materials has been working hard on expanding its product offering beyond semiconductors and has been pretty successful in that so far. The company is in a very good position to take advantage of the transition from LCD to OLED technology. There has been a rapid growth in the market for large-format TVs, which AMAT has been quick to spot. The company has seen how this trend has opened upp opportunities to invest in new Gen 10.5 capacity and Applied Materials is currently tracking seven Gen 10.5 projects. AMAT is well positioned to take advantage of growth in mobile. Demand for bigger, higher resolution and low-power screens for mobiles will primarily drive the Display segment.

From a financial standpoint Applied Materials reported Q1 fiscal 2021 non-GAAP earnings of $1.39 per share, back on February 18th. The bottom line numbers surpassed the street’s estimates by 9%. Moreover, the Q1 2021 earnings improved 11.2% sequentially and also rose 42% year over year.

Net sales of $5.16 billion also surpassed the street’s estimate of $4.94. Also, the top line rose 24% from the year-ago period as well as 10.1% from the previous quarter.

As of Jan 31, 2020, cash and cash equivalent balance, and short-term investments were $6.6 billion compared with $5.7 billion as of Oct 25, 2020.

Inventories were $3.92 billion in the fiscal first quarter compared with $3.90 billion in the fiscal fourth quarter. Accounts receivables increased to $3.04 billion in the reported quarter from $2.9 billion in the previous quarter.

Long-term debt was $5.449 billion at the end of the fiscal first quarter compared with $5.448 billion at the end of the fiscal fourth quarter.

Applied Materials generated a cash flow of $1.4 billion, up from $1.3 billion in the prior quarter. The company returned $201 million to shareholders through cash dividends.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 5 months taking the price from the $57 level back in November, 2020 to the $142 all-time highs in the beginning of April, 2021. This represented an astonishing 149% gain for the stock in just 5 months. However, the road to the above-mentioned all-time highs was not easy and was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. There were few10-15% corrective movements that took place in December, January and March, but the uptrend remained intact on all occasions. The stock has continued to attract a lot of investors’ attention as it remains one of the leaders in the semiconductor space. The unique position that Applied Materials has obtained in this high growth segment of the market has turned the stock into a go-to choice for both small retail and large institutional investors looking to invest indirectly in powerful themes like 5G, IoT, Renewable Energy, Automation, Artificial Intelligence, Virtual Reality, Augmented Reality etc.

We would wait for a bit of a profit-taking correction and start buying the stock at around the first support at $125-130. Should the price drop further, we would be interested in adding more to our long positions at the next key support at $105-110. Our initial profit-taking target is set at $165, followed by the next target at $185 where we would be fully cashing in our profits.

The stock is currently sitting at its all-time highs at $142 per share. We saw that the stock found a lot of buying interest around the $105 level in the beginning of March as the confluence of both the horizontal and diagonal support lines at that mark brought a lot of buyers back to the market. Investors saw the opportunity to buy into one of the leaders in the semiconductor space at a 17% discount and didn’t think twice about it. The recent failure of the price to break below the $105 support back in March and the subsequent sharp price appreciation could be taken as a signal for the presence of a strong bullish interest in the stock. This in turn confirms that the long-term uptrend has resumed and that the current bullish run will most likely take the price to new all-time highs in the coming weeks. Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market.

We expect most of the big tech names as well as other market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLK will be one of the best performing sector ETFs in April. We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19, the newly formed office in DC, the economic recovery, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, our analysis shows that the winners would most likely continue to win in the stock market. We are strongly bullish on Applied Materials in both the short and long term and believe that any price corrections must be treated as a great opportunity to buy this strong performing stock at a good discount, which would in turn give us a chance to maximize our profits to the upside. Moreover, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have recently made a meaningful push higher after retracing from overbought conditions throughout March. The RSI is about to push into overbought territory on the daily chart, which is a great short-term indication for the presence of a strong bullish momentum, but it is also a rather bearish sign from a mid-term standpoint, as it indicates that the price will most likely overextend its up move, which in turn could bring back sellers and profit takers to put downward pressure on the price.

In addition to that, it is important to note the fact that the XLK and the Technology sector as a whole would continue to attract a lot of the investors’ attention moving forward, as technology is everything nowadays and the companies in this space are the ones shaping up our future. This makes us optimistic for the future performance of AMAT as a meaningful part of the ETFs structure. Our analysis shows that as a result of the great leadership performance by the senior management of the company and the phenomenal fundamental positioning of AMAT through its portfolio of products and services, the stock will be able to hold its ground better than some of the other stocks out there in the event of a correction, and it would also significantly outperform the broader market once the uptrend resumes.

Acknowledging the fact that we have never liked chasing stocks at their all-time highs regardless of how much we like the stock and the underlying business prospects, we would like to point out that starting a Long position at these levels would not be recommended, as it will come with an unfavorable risk-reward profile. We would advise our followers to wait for a pullback down towards the $125-$130 zone before opening their BUY positions. Our profit targets will be placed at $165 and $185 respectively. Any larger corrections on the stock down towards the $105-110 levels should be treated as strong buying opportunities.

FedEx (FDX)

Company Background

FedEx is an American multinational delivery services company headquartered in Memphis, Tennessee. The company, founded in 1971, provides a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the FedEx brand. Today, FedEx is consistently recognized as one of the most admired brands in the world and one of the best places to work. But like many innovative companies, the company started out as an idea to connect people and possibilities championed by a determined person.

In 1965, Yale University undergraduate Frederick W. Smith wrote a term paper that invented an industry and changed what’s possible. In the paper, he laid out the logistical challenges facing pioneering firms in the information technology industry. He proposed a system specifically designed to accommodate time-sensitive shipments such as medicine, computer parts, and electronics. Smith’s professor apparently didn’t see the revolutionary implications of his thesis, and the paper received just an average grade.

In August 1971, following a stint in the military, Smith bought controlling interest in Arkansas Aviation Sales, located in Little Rock, Arkansas. While operating his new firm, he saw firsthand how difficult it was to get packages and other airfreight delivered within one to two days. With his term paper in mind, Smith set out to find a better way. Thus the idea for Federal Express was born: A company that has revolutionized global business practices and that now defines speed and reliability.

Current position – Financial Performance & Future Growth Prospects

The events of 2020 and the way the global pandemic further expedited the transition from brick and mortar to online sales, have definitely played well into FedEx’s core business activities. The more people shop online, the more the need for fast, safe and reliable delivery, becomes an inseparable part of every person’s life. This has translated into higher business volumes for the company, which in turn has allowed FedEx to deliver a better-than-expected financial performance for the fiscal 2020. The company beat the quarterly consensus estimates on all 4 occasions last year. The company beat on revenues as well as earnings per share and both metrics also improved year over year. The higher residential volumes seen on a global scale, have led to a material 37% revenue increase for the FedEx Ground segment, which entirely focuses on e-commerce deliveries for many retailers.

FedEx has always been a shareholder friendly company with regular and consistent stock buybacks, dividend distribution etc. and the company stayed true to this policy even throughout the global economic hardships and uncertainty of 2020. Moreover, its dividends have increased at a 5-year CAGR of 26%.

The senior management at FedEx has also been very active on the acquisition front throughout the last two decades in an attempt to further solidify the company’s global dominance in the delivery services space. Some of the more notable and strategic acquisitions so far have been:

-2006 United Kingdom: FedEx acquired ANC Holdings Ltd, a U.K. domestic express transportation company, and rebranded it as FedEx UK.

-2007 China: FedEx acquired Tianjin Datian W. Group Co. Ltd.’s 50 percent share of the joint venture between FedEx and DTW International Priority Express, along with DTW Group’s domestic express network in China. FedEx then launched a domestic express service for the Chinese market.

-2007 Hungary: FedEx Express acquired Flying-Cargo Hungary Kft.

-2011 India: FedEx Express acquires Prakash Air Freight Pvt. Ltd. (PAFEX) and AFL Pvt. Ltd./Unifreight India Pvt. Ltd.

-2011 Mexico: FedEx Express acquired Servicios Nacionales Mupa, S.A. de C.V. (MultiPack).

-2012 Poland: FedEx Corporation acquired courier company Courier Opek Sp.z o.o. (Opek).

-2012 France: FedEx Corporation acquired express transportation company TATEX.

-2012 Brazil: FedEx Corporation acquired transportation and logistics provider Rapidão Cometa.

-2014 Africa: FedEx Express acquired Supaswift businesses in South Africa and six other countries; Botswana, Malawi, Mozambique, Namibia, Swaziland and Zambia.

-2014 North America: FedEx Corporation acquired Bongo International, a leader in cross-border enablement technologies and solutions, and rebranded it as FedEx Cross Border.

-2015 North America: FedEx Corporation acquired GENCO, one of North America’s largest third-party logistics providers, and rebranded it as FedEx Supply Chain.

-2016 Europe: FedEx Corporation acquired TNT Express, one of the world’s largest express delivery companies, which offers road and air delivery services in Europe, the Middle East and Africa, Asia Pacific, and the AmericasWe are also positive on FedEx’s acquisition of Cargex. The buyout has strengthened FedEx’s Latin American footprint.

– In December 2020, FedEx completed the acquisition of ShopRunner, a Chicago-based e-commerce platform connecting online shoppers with their favorite merchants and brands. With FedEx gaining significantly from the surge in e-commerce demand amid the coronavirus pandemic, the ShopRunner acquisition provides a further boost to the company’s e-commerce offerings. ShopRunner will now operate as a subsidiary of FedEx Services.

From a financial standpoint FedEx is a cash rich and very liquid company as FedEx exited the third quarter of fiscal 2021 with cash and cash equivalents of $8,856 million, way above the debt load of $646 million. This indicates that the company has sufficient cash to meet its current debt obligations. Additionally, the company’s current ratio, a measure of liquidity, was pegged at 1.60 at the end of the third quarter of fiscal 2021 higher than its industry’s average of 1.29. This liquidity ratio measures a company’s ability to pay short-term obligations.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 12 months taking the price from the March 18th lows of 2020 around $88 to the $302 all-time highs reached in the beginning of December, 2020. This represented an astonishing 243% gain for the stock in less than 9 months. However, the road to the above-mentioned all-time highs was not easy and was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. There were few 10-15% corrective movements that took place during this strong uptrend, but the uptrend remained intact on all occasions. The stock has continued to attract a lot of investors’ interest as it remains the global leader in the delivery services space. The way that FedEx has managed to evolve from a delivery company into a well-balanced and versatile corporation with a broad portfolio of transportation, e-commerce and business services, has turned the stock into a go-to choice for both small retail and large institutional investors looking to add some Transportation – Air Freight and Cargo exposure to their portfolios.

We would wait for a bit of a profit-taking correction and start buying the stock at around the first support at $265-275. Should the price drop further, we would be interested in adding more to our long positions at the next key support at $250. Our initial profit-taking target is set at $340, followed by the next target at $360 where we would be fully cashing in our profits.

The stock is currently sitting at $283 per share, which is just 6.2% below its all-time highs of $302 per share. We saw that the stock found a lot of buying interest around the $245 level throughout the last 3 months as the confluence of both the horizontal and diagonal support lines at that mark has continued to bring a lot of buyers back into the market. Investors saw the price decline back in the period January-February as a great opportunity to buy into one of the most consistent and stable companies out there and they didn’t think twice about that. The recent failure of the price to break below the $245 support and the subsequent sharp price appreciation could be taken as a signal for the presence of a strong bullish interest in the stock. This in turn confirms that the long-term uptrend has resumed and that the current bullish run will most likely take the price to new all-time highs in the coming weeks. Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of the big tech names as well as other market favorites like FedEx to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLI will be one of the best performing sector ETFs in April. We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19, the newly formed office in DC, the economic recovery, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, our analysis shows that the winners would most likely continue to win in the stock market. We are strongly bullish on FedEx in both the short and long term and believe that the most recent price corrections must be treated as a great opportunity to buy this strong performing stock at a good discount, which would in turn give us a chance to maximize our profits to the upside.

Moreover, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have continued to steadily grind higher showing the high investor interest in the stock. The RSI has already broken above 60 and is headed towards overbought territory on the daily chart, which is a strong bullish confirmation for the stock.

In addition to that, it is important to note the fact that the XLI and the XLK (Technology sector) would continue to attract a lot of the investors’ attention moving forward, as the constant rotation from growth into cyclicals will continue to be a major theme throughout 2021. This makes us optimistic for the future performance of FDX as a meaningful part of the XLI ETFs structure. Our analysis shows that as a result of the great leadership performance by the senior management of the company and the series of strategic acquisitions that the company has made in throughout the last 2 decades, it currently holds an outstanding position for not only keeping its current growth momentum but also further expanding it in the future.

Acknowledging the fact that we are in a position to buy the stock at a relatively small discount from the all-time high levels, we would like to point out that buying at these levels would be more suitable for our risk-oriented investors and that our more risk-averse traders should wait for an additional 3-5% correction before jumping in. Thus, we are advising all of our followers to look at the $265-275 range for a potential long entry on the stock. Our first take profit level will be placed at $340, followed by the secondary take profit at $360.

Sincerely,

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