The word inflection has many meanings all of which relate, one way or another, to change, such as in a tone of voice. We’re interested today in change in type of semiconductor (chip) that’s needed for emerging generations of electronic products. We can leave the jargon (e.g. 3D NAND) to the engineers. We’re interested in the role $LRCX, a semiconductor equipment maker, plays in the chip inflection.

Why I’m Interested in $LRCX

I wasn’t attracted by any news, nor do I have a special thing for chips, or any particular business theme. I can take or leave any of them. My interest is stirred by the appearance of a stock in a model I use and have reason to trust.

Lam Research (LRCX) is the longest-tenured position in my Smart Alpha Cherrypicking the Blue Chips model, which can be seen with a free membership on Portfolio123 in the platform’s Ready-to-Go section. I’ve been holding for 135 days, compared to 113 days for the second-longest held position and an average of 26 days for the remaining eight holdings. That says something, considering that the model refreshes weekly. (By saying this I probably unleashed a jinx that will result in me selling next week! But even if that happens, the stock is worth noting as an example of the kind selected by this so-far successful rues-driven strategy.)

Why the Model Cherrypicked LRCX

It’s big: First, and most obvious, it’s an S&P 500 constituent. That’s not necessarily always a great thing. For many, the only positive investment characteristic associated with this stature is liquidity. Large investors own it because, well, because. It’s often just that simple. When you have to commit billions in the equity market, it’s not as if you can park meaningful sums in hot small-caps. But today, there’s more. Rightly or wrongly, many perceive mega-cap stocks as better choices when the market shifts to a risk-off stance.

Its value – sort of: It was a pretty good value play when I got in on 4/13/15. Now, it’s just so-so (I’m OK with that. What value investor wants to buy a value play and then sell when it’s still a value play? Overpriced is what we crave for stocks we’re holding.) LRCX is heading in the right direction, but it’s got a ways to go. Based on metrics that use trailing 12 months data, the stock is above industry medians so we have to talk more about growth to justify valuation (which is do-able, as will be discussed below.) Price/Sales, Price/Free Cash Flow and Price/Book stand at 2.44, 27.25 and 2.52 versus medians of 2.06, 22.26 and 2.22. The good part is PE based on estimated future results: LRCX sells at 11.93 times the estimate of current-year EPS and 10.69 times next year’s estimate (versus medians of 16.91 and 14.08).

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