If you think China‘s tech sector is all about playing copycat, think again.
The United States has fallen behind in a key field. It lies at the heart of such cutting technologies as Artificial Intelligence, machine learning, Big Data, even cracking the mysteries of the universe.
That’s why on June 14, the U.S. Department of Energy (DoE) said it will provide a three-year, 258 million grant to six American tech leaders. The goal is simple: reclaim the top spot from China.
Doing so includes not just computing, but advances in the brains that runs these machines and semiconductors.
Yes, these are all great chip firms. I have no doubt they will come up with breakthrough new devices.
But let’s remember, China won’t be standing still. The world’s most populous nation wants to spur its own chip sector.
In other words, there’s more going on here than just the market for high-performance computing, which Market Research Media estimates will be worth $44 billion by the end of 2020.
We have the chance to plant a big flag in the heart of the entire $338.9 billion global chip sector. And it’s a classic supply firm that is expanding in China as it also gears up for greater sales in the U.S. and Europe.
Lam Research Corp. (Nasdaq: LRCX) supplies the key machines used throughout the chip-making cycle. We’re talking everything from thin-film deposition to plasma etching to wafer cleaning.
And since chips lie at the heart of all electronics made today, this will be a growth field for years to come. To show you why this exciting stock has so much upside ahead, let’s run it through my five filters for building wealth with market-crushing tech winners.
Rule No. 1: Great Companies Have Great Operations
These are well-run firms with top-notch leaders.
Lam Research is a company that had one of Silicon Valley’s greats behind it from its birth. Intel Founder Bob Noyce reviewed the Lam business plan. After that, the firm was able to secure funding.
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To this day, Lam Research ranks as one of the Valley’s top firms and a global leader in making chip equipment. It’s now a major supplier to Intel and is 4.2 times more valuable than its client.
And Lam’s President and CEO Martin Anstice knows how to wring profits out of sales. Before becoming CEO in January 2012, he served as chief financial officer and chief operating officer. Before that, Anstice logged senior stints at Raychem and Tyco Electronics.
Rule No. 2: Separate the Signal From the Noise
To create real wealth, you have to ignore the hype and find companies that have rock-solid fundamentals.
In early April 2016, the chip sector came under pressure on fears of falling global demand going into the second quarter. This got a lot of play in the media.
These reports turned out to be nothing more than spin – chips rallied and remain on the rise.
Savvy Lam investors could have cleaned up. From the time it began to bounce back on April 13, the stock climbed for recent peak gains of 31.8%. As one of the sector’s top players, it’s got market-crusher written all over it.
Rule No. 3: Ride the Unstoppable Trends
Look for stocks in red-hot sectors because they offer the best chance for life-changing gains.
By investing in a chip supply firm like this one, you are actually putting money into several trends at once. After all, chips lie at the heart of just about every piece of electronics in the world today from TVs to smart phones to “connected cars” to cloud computing routers.
Just look at the impact of those last two. Luxury cars now have $1,000 worth of chips on board, with even midrange cars coming in at $400. Research firm Technavio says just the market for Internet Protocol chips used in Web connections will grow 15% a year through 2020.
Overall, chip sales are expected to rise 7% to approximately $364 billion this year alone, tech researcher Gartner Inc. said. That’s a roughly $58 billion gain since the end of 2011.
Rule No. 4: Focus on Growth
Companies that have the strongest growth rates almost always offer the highest stock returns.
We get a good sense here of a firm that still has plenty of runway left. Sales growth is actually rising. Over the past three years, sales have climbed by an average 15%, doubling every 4.8 years.
But last quarter, they surged 64%. Let’s say Lam ends the year at half that rate, sales will still double every 2.3 years. Even better, profits are rising much faster than sales.
That’s important because this is a company that clearly knows how to manage its growth. Last year, it brought in nearly $1.2 billion in free cash flow and now has $3.1 billion in net cash on hand.
Rule No. 5: Target Stocks That Can Double Your Money
This is where we look at Lam’s earnings growth and see how long it will take to double profits. By doing that we can figure out how long on average it should take for the stock to roughly double.
In the first quarter, net profits jumped by 137% and are expected to rise by nearly 60% for the June quarter. But to be conservative, let’s forget about those massive gains and instead use the firm’s 3-year average of 24%.
Now, let’s plug that into my doubling calculator. Mathematicians call it the Rule of 72. I divided the compound growth rate of 24 into the number 72 and found that the stock could double right at three years from now.
With a market cap of $23.9 billion, the stock trades at roughly $148. It pays a dividend of 1.8%. Although it’s a small amount, you should reinvest them in the stock.
Add it all up and you can see that Lam Research is a great foundational holding.
With this play, you’ll tap the power of the global chip boom with a quality that will hand you returns for years to come.