Money is becoming more expensive, as the United States federal reserve has been acting on its mission to lower the nation's rampant inflation rates seen during 2022. With rising interest rates as the primary weapon of inflation neutralization, investing in companies that over-promise and under-deliver has become a thing of the past; meme stocks are no more.
What this means for investors is simple, those quiet and boring stocks that nobody wanted to touch because names like GameStop (NYSE: GME) and AMC Entertainment (NYSE: AMC) were flying are now becoming the law of the land. Expensive money means every decision - and investment - counts ten times as much, so money is rotating into safer and more stable industries, which also happen to be performing quite well during these economically transitory times.
The machinery industry has been a standout recently, following its trends in the ISM manufacturing PMI index. Still, investors can handle the details. The job has been done to arrive at the three market favorites within this space, allowing investors to focus on deciding which - if not all - to buy.
Kulicke and Soffa
Presented with an uptrend trading channel and a recent beat on second-quarter 2023 earnings, investors can start their early Christmas list with Kulicke and Soffa Industries (NASDAQ: KLIC). While some of the company's significant KPIs (Key Performance Indicators) missed out on some of the expected growth, other markers in the quarterly results pointed to a bright future ahead.
The latest investor presentation will showcase a magnificent development in the company's financials, with a 10.3% revenue growth rate to start, earnings per share grew by an astonishing 44.7% over the past twelve months as a result of cost management, and a total share repurchase program of 2.5 million shares.
Before continuing, investors can find these buybacks as a subtle hint from insiders believing two critical trends. First, buying stock may imply that it is undervalued, and who else would know better than management? Secondly, it can be taken as a sign that the future outlook for the business is nothing but bullish; otherwise, management could pay a dividend or keep these funds in the balance sheet as cash.
It would seem that markets got sick of the bullish bug, as they, too, are expecting some above-average growth from this name. The forward price-to-earnings ratio, which places a quality value on future expected earnings, will clarify that Kulicke is a favorite today.
Carrying a 22.7x forward P/E will place Kulicke above other semiconductor machinery providers like Axcelis Technologies (NASDAQ: ACLS), who trade for 21.6x. This willingness to overpay for each dollar of future earnings in Kulicke speaks for itself, as markets want to expose themselves to the future growth perceived in the name.
Spillover effects from this heating industry have found their place in MKS Instruments (NASDAQ: MKSI), as the company reported a net double-digit growth in revenue from the previous quarter to the most recent. While annual sales declined by 11%, investors should remember that these businesses oversee a turnaround in their respective industries, so the highlight remains on the quarter-to-quarter stats.
Investors can lean on the fact that the company's acquisition of Atotech last year is beginning to pay dividends, as cost synergies have amounted to a total of $30 million saved so far, boosting margins as a result and enabling the 10% operating margin expansion to a current 46.9% level.
These trends and the industry recovery as a whole may be enough factors to push the current price target in the stock set by analyst ratings. A net 6.4% upside is missing the spice brought on by a 175% increase in earnings per share over the past year, where the stock ended up declining by as much as 11.5%.
As a wide gap relative to the stock's performance, the financial performance may be closed down after markets take a more profound interest in the sector. In any case, the global battle for semiconductor machinery equipment will surely be one heck of a tailwind pushing demand for MKS products, boosting margins further.
Stanley Black & Decker
While not the clearest in the sense of where the growth may be coming from, Stanley Black & Decker (NYSE: SWK) is the story that markets love and reward in preparation for an explosive quarter. This stock has found its bottom recently, as it has been breaking out to the upside since May 2023 after a severe 66% decline from its $225 per share all-time high.
Markets are placing a premium value on this stock; investors can follow the same forward P/E logic as before and arrive at a 20.4x valuation, which will put Stanley as the highest-perceived quality company in the peer group. Other large-cap names competing with Stanley include Snap-On Incorporated (NYSE: SNA), which trades at an inferior 14.4x multiple.
This market willingness to pay a premium price for each dollar of future earnings in Stanley can indicate confidence around a brighter future ahead. Management has also reported some positive initiatives despite a challenging period; $ 460 million in cost savings have aided in operational margin expansion, a trend that - if continued - can deliver some pleasant EPS surprises.