Author: Billy Duberstein

AMAT – If Data Is the New Oil, This Stock Will Soar

For the past 10 years or so, a popular phrase in the technology industry has been, “data is the new oil.” The thinking behind that saying is that while oil powered much of the 20th-century economy, the collection, processing, and use of data in decision-making would power the economy of the 21st century.

Given the current massive shortage of semiconductors coming out of the pandemic pushing up prices for various goods, especially cars, it looks as though that term is turning out to be true.

Assuming accelerating data growth continues this decade and beyond, Applied Materials (NASDAQ:AMAT), the largest, most diverse semiconductor equipment company in the world, stands to benefit handsomely. Yet although the company just reported another strong quarter last week, miraculously, the stock still trades at a cheaper valuation than the overall market.

A semiconductor wafer emerges from a pile of gray minerals.

Image source: Getty Images.

Another quarter of booming growth

In the company’s fiscal third quarter ending in June, Applied’s revenue surged 41%, while earnings per share grew a whopping 79% and free cash flow doubled. Applied has the largest and broadest portfolio for semiconductor equipment in the industry, spanning etch, deposition, metrology, and even advanced packaging, along with a slew of value-add services. 

Currently, just about all of Applied’s segments are firing on all cylinders, with each of its segments outperforming expectations, according to management. Though the semiconductor equipment industry is in a boom right now, Applied took market share last year on top of that, despite its already being the largest company in the space.

So why’s it so cheap? 

Despite these eye-opening results, Applied Materials’ stock still trades at a discount to the market, at 19.3 times this year’s earnings estimates (its fiscal year ends in September). That’s below the 31 P/E ratio of the S&P 500 and even lower than the 22 P/E forward ratio for the S&P based on next year’s earnings estimates.

With a high-margin business and balance sheet with $6.1 billion in cash against just $5.5 billion in debt, Applied Materials is also repurchasing shares at what seems like a great price. Last quarter, the company bought back $1.5 billion in stock. If one annualizes that to $6 billion, that’s good enough to retire 5.2% of the company’s shares at current prices, on top of a 0.75% dividend, good for a total shareholder return of nearly 6%.

The reason investors may not be giving Applied Materials its due is due to the highly cyclical past of the semiconductor industry, which has traditionally caused rather large swings in equipment sales from year to year. 

A brain on top of a semiconductor chip on printed circuit board.

Applications like 5G and artificial intelligence are driving a semiconductor super-cycle. Image source: Getty Images.

Why Applied’s future may not be as cyclical in its past

While it’s always dangerous to say “this time is different,” there are a number of reasons why semiconductor equipment sales should be more consistent into the 2020s, and why companies that produce them should also be more resilient.

First, given the increasing importance of semiconductors, as well as the difficulty and capital intensity of producing leading-edge chips, chip foundries have announced multi-year investment plans, to the tune of hundreds of billions of dollars. On the conference call with analysts, Applied’s management disclosed a backlog of orders reaching nearly $10 billion — an all-time record for the company.

At the same time, Applied Materials and its peers have also developed lots of value-add services to help customers get the most of out of their machines, while also developing recurring subscription services within that services segment, which currently makes up 21% of revenue. Chief Financial Officer Dan Durn talked at length about Applied’s growing recurring revenue segment on the conference call:

Connecting the installed base to our AIx servers enables us to perform data-enabled services for our customers. Today, we have just over 4,300 connected tools, which is up over 30% from our 2020 baseline. We’re also growing the number of secure remote connections, which allows us to connect our best experts to the installed base to perform remote analytics, diagnostics, and optimization from anywhere in the world. The number of remote-connected tools now exceeds 3,200, which is up over 36% from our 2020 baseline. Another key focus is transitioning our recurring revenue to subscriptions in the form of long-term service agreements. Today, we’re generating 60% of our recurring revenue from subscriptions, and our goal is to reach around 70% by 2024. We also have a subscription renewal rate of around 90%. Another sign of customer value is the tenure of the agreements. Across the entire base of subscription agreements, we’ve increased the tenure from 1.9 years at the end of 2020 to 2.2 years today. In fact, of our subscriptions booked in Q3, 77% were multi-year agreements. We track all of these KPIs very closely. Finally, another key metric we disclose is AGS segment operating margin, which provides a good indicator of the value our services bring to customers. In Q3, it crossed 30% for the first time in 15 years.

Another point of good news on the services front is that Applied’s machine sales are growing faster than overall company sales, with systems revenue up 53% last quarter. Applied earns services revenues based on the number of chambers in its installed base, so those surging equipment sales should lead to future recurring services revenues for the life of those machines it’s selling today.

Given the long-term spending plans by customers and rising recurring services revenues, Applied’s current financial strength could be more consistent in the future than the market is giving it credit for. If that’s true, shares sure look cheap after its 13% pullback from recent highs.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

LUMN – Why Lumen Technologies Rose 39.4% in the First Half of 2021

What happened

Shares of Lumen Technologies (NYSE:LUMN) rose 39.4% in the first half of 2021, according to data from S&P Global Market Intelligence. The telecom company rose from a very low valuation coming into the year. Like many other value stocks in 2021, Lumen seemed to benefit from sentiment around the economic recovery coming out of the COVID-19 crisis.

From an operating perspective, in the first half, Lumen continued to post revenue declines, which has contributed to low sentiment and a bargain-basement valuation. Yet the company also wrung more profits out of each dollar, expanding profit margins, and there were even some green shoots in certain segments of Lumen’s results. That may have garnered optimism for management’s turnaround plan.

Three workers sit at computers wearing headsets.

Image source: Getty Images.

So what

Lumen is repositioning itself from a copper-based telecom with a large business in landline phones to one with an emphasis on fiber-based communications and edge computing, data centers, content delivery and security markets. While Lumen doesn’t participate in a big way across all of those segments, these markets are slated to grow at a 14% average growth rate through 2024.

Despite the targeting these high-growth segments, Lumen’s revenue still fell in the first quarter by 3.8% — slightly worse than analysts predicted, as its legacy businesses continued to weigh on results. And yet, there were some silver linings: Adjusted EBITDA margins continued to expand to 43.1%, up from 42.3% in the year-ago quarter. Lumen’s fiber infrastructure services also grew across both enterprise and wholesale markets, and the newly branded Quantum fiber consumer broadband grew revenue as well. However, these high-profit segments still make up a relative minority of Lumen’s revenue base.

Now what

It remains to be seen whether Lumen can successfully transition to more new-age services — hence why the stock trades so cheaply. Management expects $2.8 billion to $3 billion in free cash flow this year. At a market cap of just $14.6 billion, the stock trades at a multiple of just five times cash flow at the midpoint. That cheap valuation enables the company’s 7.5% dividend to be covered nearly three times over by cash flow.

Of course, Lumen also has a high debt load around $31.3 billion as of last quarter; however, Lumen has also been paying that debt down gradually over the past few years, and has also been able to take advantage of the current low-rate environment to refinance higher-rate notes.

Lumen is not likely to be a millionaire-maker growth stock anytime soon, and Wall Street is right to be somewhat skeptical; however, if the company continues to make incremental progress in its business transformation, the stock has the potential to rerate much higher, even after its good first half.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

MU – Micron's Costs Are Going Up: Here's Why I'm Buying Anyway

I’m a proud owner of Micron Technology (NASDAQ:MU), but it’s not a stock for the faint of heart. Despite good long-term growth prospects for memory demand, Micron trades at an enormous discount to the market and especially other tech stocks – even peers in the volatile semiconductor sector. That’s because of the historical high cyclicality of the memory business, which is prone to booms and busts.

Case in point: Micron’s recent earnings report, in which the company posted stellar numbers across the board, while also giving solid guidance. Yet as always, investors chose to focus on the negatives, real or perceived. Here’s what those concerns are, and why I’d be a buyer of this dip despite them.

Closeup on two differently sized microchips help in hands.

Image source: Getty Images.

Costs and investments are going up this year and next

Memory crashes tend to happen when the industry overinvests in supply when demand is good and memory prices are rising, only to have too much capacity when demand hits an air pocket and pulls back. Currently, we’re in the early stages of one of those good times. Last quarter, Micron’s revenue surged 19% quarter over quarter and 36% year over year. Adjusted (non-GAAP) earnings per share nearly doubled quarter over quarter. Management projected the growth to continue next quarter, forecasting 10.5% sequential revenue growth and 22.3% sequential earnings growth.

Yet on the subsequent conference call, Micron explained it would be increasing costs more than the market may have expected. First, the company announced that it was ready to deploy extreme ultraviolet (EUV) technology into its DRAM production starting in 2024. But because of EUV supply constraints, Micron has to make early pre-payments to secure these expensive machines.

Second, although Micron is lowering costs through node transitions, it’s also targeting more specialized, higher-value types of memory solutions — but those come with higher costs. The worry here is that Micron will be producing more expensive chips in 2022, a time when some believe we could be seeing falling memory prices.

Perhaps adding to the concern was that Micron only repurchased $150 million in stock last quarter, or only about 10% of its free cash flow, below the company’s long-term 50% target. That could indicate Micron is being cautious about its balance sheet for some reason.

Why I’m not worried

Given not one but several surprising wrinkles in the company’s spending plans, so it’s no wonder Micron investors — already a skittish bunch — sold off the stock, which is down some 20% from its April highs.

MU Chart

MU data by YCharts

Still, I think these concerns are a bit overblown. Yes, the EUV costs are coming sooner than expected, but Micron said its capex would increase this year from around $9 billion to over $9.5 billion. Micron is flush with over $9.8 billion in cash, and it will likely be very profitable over the next couple quarters at least, so it should be able to afford these hundreds of millions in early payments.

Second, although costs for higher-value chips will be, well, higher, Micron should still be able to earn as good or better margins on those products, at least relative to lower-cost chips. After all, there’s a reason management is targeting higher value solutions. Higher-value chips may also be less prone to price drops than more commodity-like memory chips. Zinsner noted on the conference call, “we are trying to drive toward higher value products, which, arguably, on a like-for-like — or at least on a comparable basis to other products would carry better gross margins.”

Finally on share repurchases, Zinser also told investors not to worry:

I think you’ll find in the fourth [fiscal] fiscal quarter that our buybacks are meaningfully higher than our third fiscal quarter. So nothing to read there, we do feel like this price is obviously a good price to be buying the stock back. And we are committed to what we’ve talked about previously, which is to return at least 50% of our free cash flow in the form of buybacks.

Micron’s stock price is now lower than it was for much of the fiscal third quarter ending in May, making buybacks more attractive, so perhaps this was just a bit of savvy timing by management.

Another possibility is that Micron has set liquidity targets in the low 30% range of its revenue. Therefore, if Micron is expecting big revenue growth this year and next, it may have wanted to bolster its balance sheet to keep up with its internal model. Micron ended last quarter with $12.3 billion in liquidity, and guided to $8.2 billion in revenue next quarter, or roughly a $33 billion run-rate. However, Micron has a habit of guiding conservatively, and if revenue continues to grow, Micron would have needed to add liquidity to its balance sheet. Management still expects using 50% of cash flow to fund buybacks over the long-term.

Things aren’t so bad — in fact, they’re really good

While nervous Micron investors tend to wring their hands at any imperfection, some may be overlooking how good conditions are for the memory industry right now. CEO Sanjay Mehrotra noted supply tightness in almost all of Micron’s end markets, and sees that persisting at least into 2022.

That’s due to a great combination of pandemic-fueled digitization across many industries, a strong economic recovery, and customers looking to hold higher levels of inventory going forward. Many businesses such as car manufacturers used to hold the bare minimum of chips in inventory in order to lower capital costs; however, that ultra-lean posture is costing those businesses in lost sales today.

Combined with the facts that chips are becoming more difficult to produce and the three major DRAM manufacturers have been prudent with supply growth, it’s easy to see how supply may have trouble catching up with demand for a while.

The last downturn was spurred by the U.S.-China trade war, which caused a recession-like demand shock in the memory industry, as all clients pulled back on buying at once. While a big demand shock like that could happen again, it may not happen soon, or be quite as severe. That could make this memory upcycle stronger and more durable than some anticipate. If that’s the case, then Micron is still woefully undervalued.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

PXD – This Oil Stock Plans to Sextuple Its Dividend Over The Next 2 Years

Despite being one of the strongest sectors in the market this year, the energy sector is still out of fashion with investors. Zooming out and taking a longer-term view, it’s clear that the energy sector has been a huge laggard even after its recent bounce to start 2021.

SPY 10 Year Total Returns (Daily) Chart

SPY 10 Year Total Returns (Daily) data by YCharts

Yet could things be changing? In the wake of the pandemic, and amid the rise of electric vehicles, U.S. shale producers appear to have have widely adopted a new operating and capital allocation paradigm. Major producers have consolidated, cut costs, and plan on limiting their production growth, milking assets for cash flows, and paying most of it out as dividends. As a result, U.S. oil companies’ dividends could soar as the economy recovers.

Pioneer Natural Resources (NYSE:PXD), with the lowest costs per barrel in the Permian basin, has announced its adoption of this new paradigm and stands a great chance of generating tremendous cash flow at current oil prices. As a result, management predicts its current 1.4% dividend could climb sixfold over the next two years, should oil prices stay near current levels.

Shale rig with tanker in foreground.

Image source: Getty Images.

Pioneer follows others to limit production and pay a variable dividend

Like some of its U.S. peers, Pioneer is adopting a new operational paradigm of limiting production growth to 0-5% per year, which will lower capital expenditures and generate free cash flow. Also like others, Pioneer has announced a “fixed-plus-variable” dividend beginning in 2022.

Pioneer currently pays a fixed $2.24 per share dividend, or about 1.4% at the current stock price, and plans to pay out 75% of its free cash flow above that figure over the long-term. In its own wrinkle, the company will pay out the variable dividend based on the prior year’s free cash flow, not the current year. So 2021 free cash flow will dictate variable 2022 dividends, 2022 results will dictate 2023’s dividend, and so on, as long as the company realizes WTI prices above $42.

That assures investors should know what to expect, and the company will be able to keep ample liquidity on its balance sheet. The dividend structure will partially kick in next year, when the company intends to pay out 50% of excess free cash flow while paying down debt to 0.75 times EBITDAX, then ramping up to up to 75% thereafter.

On the recent conference call with analysts, CEO Scott Sheffield said that at current strip prices — which were in the low $60s at the time of the early May conference call, but are over $70 right now — Pioneer would be able to raise its dividend yield to about more than 4% next year, and potentially over 8% in 2023, when the full variable dividend kicks in.

Pioneer’s low-cost producer status should lead to hefty cash flow

If oil producers stay disciplined and keep supply in check — and that is a big if, if history is any guide — Pioneer should be able to generate high margins. Pioneer has the lowest costs per barrel of any U.S. shale producer, with breakevens in the high $20 range. Additionally, the company just bought out two sizable oil companies, Parsley Energy and DoublePoint Energy, with land directly adjacent to Pioneer’s in the Midland basin of the Permian.

These high-quality adjacent assets should yield Pioneer an additional $525 million in operational synergies by the end of this year, further boosting margins. Pioneer used mostly stock to fund these deals, which will keep its leverage low. It’s also encouraging that both target company shareholders were willing to take equity in the “new” Pioneer entity, rather than cash.

A new beginning for oil stocks, or more of the same?

Disciplined by the shale revolution’s oversupply, it appears oil executives now realize their industry isn’t a growth industry anymore. Ironically, that could actually be a much better thing for their stocks, provided that U.S. shale producers and OPEC+ continue with their current supply discipline. By limiting growth, milking assets for cash, and returning it to shareholders, oil stocks may be able to attract yield-seeking value investors in the 2020s.

Investors will have to keep an eye out for other producers that ramp up production and disrupt this dynamic, but assuming oil demand picks up with economic reopening, the biggest dividends in the 2020s stock market could come from oil drillers, just as banks became low-growth but highly profitable dividend growth stocks last decade following the financial crisis.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

AMC – Why AMC Entertainment Skyrocketed 160.4% in May

What happened

Shares of AMC Entertainment (NYSE:AMC) skyrocketed 160.4% in May, according to data from S&P Global Market Intelligence. The largest movie theater company in the world became the latest poster child of meme stock mania, as Reddit message board WallStreetBets fueled a massive spike in this beaten-down, highly shorted stock as the economy inched closer to a full reopening.

The massive move came in spite of a first quarter earnings report showing a huge cash burn of $325 million, more dilutive equity sales to keep itself afloat, and the company’s largest shareholder for the past nine years selling its entire stake.

With all of that going on, you might have expected the stock to go down. But of course, this is 2021, the year of the meme stock! So what the heck is going on?

A grandfather and young grandchild on his lap watch a movie in a theater.

AMC stock has become the latest meme-stock to spike, as the economy nears full reopening. Image source: Getty Images.

So what

While AMC did report substantial first quarter cash burn at the beginning of the month, its U.S. theaters were only operating at 15% to 60% capacity in the March quarter, and only 27% of international theaters were open, also at limited capacity. With vaccinations accelerating faster than thought since March, reopening optimism apparently reignited the WallStreetBets message board on Reddit, because AMC’s stock began appreciating shortly after earnings.

On May 13, a few days after earnings, AMC sold another 43 million shares for $428 million, at nearly $10 per share. Given that the company had sold shares in the low-single digits last fall and winter, selling shares at $10 may have seemed like a great deal… if only management knew what was coming!

In the wake of the equity raise, sell-side analysts at B. Riley upgraded the stock, saying the raise likely lessened the need for more capital ahead of an industry recovery. While that bullish call bolstered the stock further, B. Riley only raised its price target from $13 to $16 — less than half of where shares trade now.

Then, as the stock climbed toward $12, Dalian Wanda, the Chinese group that had originally purchased AMC in 2012, sold all of its remaining shares on May 21. While most would take that as a hugely bearish sign, the stock inexplicably went on an enormous tear immediately thereafter, more than doubling to $26 per share by the end of the month.

Why did that happen? It’s hard to say. On May 26, sell-side firm CFRA upgraded AMC, but only from “Sell” to “Neutral” and giving an $18 price target. That coincided with the hashtag “#AMCSTRONG” trending on Twitter. The stock rallied about 20% that day, and continued to rise through the end of the month. A short squeeze likely played into things, as nearly 20% of shares outstanding were sold short heading into May.

Now what

The stock’s rise has continued into June, along with more capital raises. On June 1, the company raised $230.5 million at $27.12 per share from hedge fund Murdick Capital. The stock surged 20% on the news, and Murdick sold all of its stake that same day, telling clients shares were “massively overvalued,” according to Bloomberg.

Murdick had also owned AMC’s debt, likely at distressed prices, so the equity raise may have been a ploy to increase the value of its debt by increasing AMC’s creditworthiness. Although a savvy trade by Murdick, it apparently sold too early as well, as AMC’s shares skyrocketed over 100% the next day, reaching a high of $72.62, and prompting trading halts. Incredibly, AMC was allowed to sell another 11.5 million more shares to the public the following day at $50.85 per share, raising a whopping $587.4 million while only minimally diluting shareholders. Shares ended last week at $47.91.

All in all, AMC has raised $1.246 billion this quarter, adding to the $813.1 million in cash it had at the end of the first quarter. The company is still likely burning through cash, so it likely has a little less than $2 billion in cash against a still-high $5.46 billion in debt — and some of that at very high interest rates. The company’s share count has also nearly quintupled from pre-pandemic levels to 502 million shares outstanding.

Ironically, with investors bidding up the stock and the company selling shares, likely well above intrinsic value, AMC has likely fended off bankruptcy for the foreseeable future and actually increased the intrinsic value of the company. For instance, if a company is really worth $1, but is able to sell shares at $10, let’s say, doubling its share count, it increases the company’s intrinsic value from $1 to $6 ($1 plus $5 per share in cash).

The problem? It’s still worth $6 — less than the $10 price at which investors bought shares. Ironically, the more shares the company sells above intrinsic value, the closer intrinsic value will move toward the sale price, but it will never exceed that value.

The big exception to that rule is if the company can use that cash to make high-return investments that will increase intrinsic value going forward. That is also possible, as CEO Adam Aron said on the Murdick capital announcement that “it was time for AMC to go on offense again,” saying AMC is pursuing the high-end deluxe theater chain Arclight Cinemas in California, which went bankrupt this year as a result of the pandemic, as well as other “highly attractive theater opportunities.”

So if AMC sold shares at high prices, and can then buy high-quality theaters at bargain prices, and if movie-going bounces back in a big way, it could in fact create value above where the company sold shares.

However, that still seems like a long shot. In 2019, before the pandemic, AMC reported “adjusted” free cash flow of $358 million — and that figure incorporated some generous adjustments. Still, assuming AMC can get back to its prior free cash flow on the new quintupled share count, that’s only about $0.71 per share. So, at the current stock price, shares are valued at 67.5 times 2019 adjusted free cash flow per share.

Of course, movie theaters weren’t exactly a growth industry prior to COVID, and could very well struggle to fully bounce back. Studios are shortening the window for theater exclusivity, and some may even begin releasing titles directly to streaming services in conjunction with theater releases.

While accretive theater acquisitions could add value, I doubt any acquisitions would materially increase AMC’s free cash flow, since AMC already has massive scale as the largest theater chain in the world.

Basically, shares seem massively overvalued from a fundamental point of view, and the stock is extremely risky at these levels. That doesn’t mean investors can’t make money on technical buying bursts like we’ve seen over the past month, but that’s not really investing; it’s subscribing to the greater fool theory.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

BAC – Is Bank of America the Long-Term Stock for You?

The past five years have been difficult for dividend investors. In an era of widespread tech disruption, the market has favored growth stocks that largely don’t pay dividends. At the same time, many mature companies that do pay high dividends are usually threatened by that disruption. And dividend payers that do have strong businesses tend to trade at very high valuations. 

But the banking sector is one area where investors can find dependable, rising dividends at reasonable valuations today. Technology growth stocks, last year’s winners, have sold off on fears of higher interest rates, but most large banks stand to benefit from rising rates, which can boost their net interest margins. As such, banks may be excellent havens for risk-off older investors and retirees today. Among banks, perhaps none is better-suited for this risk-off cohort than Bank of America (NYSE:BAC).

A couple consults with their banker at a conference table.

Image source: Getty Images.

Warren Buffett’s favorite

Warren Buffett sold many bank stocks last year, but he added to his Bank of America stake. Buffett’s conglomerate, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), owns just over 1 billion shares, good for 11.4% of the Berkshire’s equity portfolio, and its second largest public equity holding overall.

Why does Buffett love Bank of America so much? Probably for its conservative underwriting philosophy under CEO Brian Moynihan, excitingly named “Responsible Growth.” 

Responsible growth

Since Moynihan took over in 2010, Bank of America has largely stuck to its knitting with straightforward lending, while avoiding risks and exotic products like those that recently got several banks in trouble with hedge fund Archegos Capital Management. In the wake of the global financial crisis, the retooled “Responsible Growth” strategy has four pillars:

  • We must grow in the market, no excuses.
  • We must grow with a customer focus.
  • We must grow within our risk framework.
  • We must grow in a sustainable manner.

That risk framework is meant to be conservative, long-term-oriented, and focused on the bigger picture. As the strategy was implemented, Bank of America’s net profits have become steadier and more consistent.

Even in the pandemic year, in which some banks saw earnings go negative, with some even needing to temporarily cut their dividends, Bank of America generated $17.9 billion in net income and maintained its payout, now yielding 1.82%. Thanks to conservative underwriting, net charge-offs only rose slightly, from $3.6 billion in 2019 to $4.1 billion in 2020. Being extremely well-capitalized, Bank of America has been given the green light to resume share buybacks by the Federal Reserve.

And investing in the future

While some believe traditional banks are under threat from digital fintech upstarts, the largest and best-run banks still have competitive advantages. These include large, nationwide bank branch networks, which enable lower-cost deposits, as well as the financial means to invest heavily in technology.

BofA has invested $18 billion in technology over the past six years, while opening 300 new branches and refurbishing 2,000 others. These tech investments have enabled even bigger cost cuts; operating expenses have declined from $57 billion in 2015 to $55 billion last year, despite $1.5 billion in extra COVID-19-related costs. And that’s in spite of the company’s decision to raise its minimum hourly pay to $20 per hour in that time.

Still a value play

Bank of America trades around 15.8 times this year’s earnings estimates, in line with other large banks but still well below the overall market. Banks have generally had lower P/E ratios since the financial crisis amid low economic growth, low interest rates, and post-financial crisis regulations.

Still, Bank of America and other large-cap banks generated steady profits and high returns on equity during that time, returning cash to shareholders in the form of dividends and share repurchases. In essence, the large banks became more like dependable, low-growth utilities.

Yet those very capital regulations are what enabled the banking sector to weather the COVID-19 crisis relatively unscathed. Meanwhile, given the unprecedented amount of fiscal and monetary stimulus now coming into the economy, and with perhaps more on the way with a new infrastructure bill, the dual headwinds of low economic growth and low long-term interest rates could be reversing. Should interest rates rise, Bank of America would be likely to experience a rise in net interest income, given its loan-heavy business model.

Safety, dividends, and an inflation hedge

Large banks have generally proved to be safe amid this COVID crisis and stand to benefit from higher economic growth post-pandemic. If you wish to invest in the financial reflation trade, Bank of America is perhaps the best choice for low-risk dividend investors, such as retirees.

Yet while younger investors tend to invest in more flashy, growth-oriented companies, they could also benefit  from Bank of America’s staying power, growing dividend, and ability to thrive in a higher-rate environment.

In short, BofA is a solid choice for all types of long-term-oriented dividend investors… you know, like Warren Buffett. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

AMAT – Why Applied Materials Rose 13% in March

What happened

Shares of Applied Materials (NASDAQ:AMAT) rose 13% in March, according to data provided by S&P Global Market Intelligence.

The leading semiconductor equipment company by revenue continued to benefit as the global race in advanced chip production heated up, amid severe semiconductor shortages across a broad range of applications.

A semiconductor is etched on a wafer by a machine.

Image source: Getty Images.

So what

Applied Materials had already been up strongly on the year, amid a blowout February earnings report, as well as increased spending forecasts from large customer Taiwan Semiconductor Manufacturing (NYSE:TSM) in January. Widespread reports of a severe semiconductor shortage this year have also pushed sentiment higher for Applied as well.

The good news kept on coming in March, when Intel (NASDAQ:INTC) held an event updating investors on its future production strategy. Intel has struggled with its 7-nanometer chip production in recent years, falling behind Taiwan Semiconductor and leading some to believe Intel may scrap its in-house production entirely. Yet new CEO Pat Gelsinger did the opposite, announcing Intel would instead invest $20 billion in two new fabs (chip factories) of its own in Arizona, while also becoming a foundry for other chip designers.

That means there will be another large buyer for Applied Materials’ machines, as companies and countries around the world seek to own significant in-country chip production.

Now what

Not only is Intel looking to invest in more U.S. chip production capacity, but semiconductors are also part of the Biden administration’s new infrastructure bill, The American Jobs Act. About $50 billion of the $2 trillion bill will be geared toward advanced semiconductor research and manufacturing.

For much of the past two years, amid the trade war, Applied Materials was a cheap value stock. Now, with pandemic-era digitization trends accelerating and countries realizing the need to have critical capacity on their own shores, demand for leading semiconductor manufacturing equipment is soaring. No wonder Applied’s stock is up so much this year. Even more strikingly, the company still only trades at 22 times this year’s earnings estimates.

The company will hold its next investor meeting on Tuesday, April 6.

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