I’m coming to you from Dubai with an exciting Stock of the Week.

With the growing demand for semiconductors and the rise of artificial intelligence (AI), the company I have for you is positioned for sizable growth.

It has strong financials, including a 20% CROCI and an outstanding 74% return on equity.

Yet its forecast P/E comes in at just 18.

It’s more proof the market is underestimating AI’s impact. (Just look at Nvidia!)

And considering the stock has low volatility and has been outperforming the market…

There are big gains to come… and a new all-time high could be in the cards.

Get all the details on the company – including the ticker – in this week’s video.

Click on the image below to watch it.

Transcript

Hi, everyone. Welcome from Dubai. Excuse me, it’s a little bit noisy.

I’m out here on business, just looking at some of the latest AI programmers who I can get to help me with some of our stock and investment picking.

Now, there’s also another reason I’m here. It relates to the Stock of the Week as well, because that too is benefiting from some of the growth in AI. And it’s a special one. I’m going to focus more on stocks if I can, on that front.

It’s Lam Research (LRCX).

And by the way, let me introduce myself. For those of you who don’t know me… and most of you will… I’m Alpesh Patel, hedge fund CEO. My team, as you know, every week come up with a short list of stocks. And this is one that I’ve looked at in the past, have commented on in the past, and it’s here again.

So Lam Research… I’ve got my notes right in front of me. You may well know it’s a global supplier of innovative wafer fabrication equipment and services to the semiconductor industry. Semiconductor industry, okay? Lam’s equipment and services allow customers to build smaller and better-performing devices.

You can sort of see where I’m going with this and what’s happening with AI and the demand for semiconductors, can’t you?

It’s a Fortune 500 company headquartered out of California. It produces advanced memory and logic chips used in various electronic devices and also equipment for thin film deposition, plasma and things that I don’t even understand but know from what my team has researched is incredibly important.

It’s had continued growth in revenue and profitability for the past few years. It’s got a market cap of $83 billion. So we’re not talking small.

Let’s look at some of the numbers…

It’s forecast to grow profits and revenues by 5% and 1.9% per annum respectively. And return on equity is forecast to be 39.3% in three years.

Those are really good numbers.

Sticking with those financials… On my Growth-Value-Income rating – my proprietary algorithm that scores and ranks and rates stocks on a scale out of 10 based on valuation, growth and income – this has got a score of 8.

It’s got a CROCI of 20.4%. If you want to know why CROCI – or cash return on capital invested – is so important, there’s a link at the bottom of the page. CROCI was invented by Deutsche Bank and is used by Goldman Sachs Wealth Management to find the best-performing stocks.

Return over the last six months has been strong. So there’s momentum there.

Sortino, a measure of average return versus the risk of missing it, is 0.69 – that’s good enough for me. It’s above the minimum that I want to see, which is about 0.3.

Volatility is below 20%. Again, good. And it’s been outperforming the market.

So one of the numbers caught my attention. Turnover’s been going in the right direction. Forecast P/E ratio is only at a multiple of 18. That means the current share price is only at a multiple of 18 times forecast profits.

I think the profit forecasts are too low. I think the forecasts are too low and the company will overachieve those and, therefore, the share price will rise.

Another thing that caught my attention… I’ve already mentioned cash return on capital invested. And depending on the measures you use and the periods, you can get a number that I mentioned earlier or 20.4%, depends on the measures used.

Return on equity is 74%. Really strong returns on the capital the company has.

Profit’s going in the right direction. Borrowing’s been coming down over the last couple of years, and that’s good.

Pretax profit are going in the right direction. Total assets are going in the right direction. All pointing in the right direction for me.

Now, the company had a fall, like so many tech companies last year. But, but, but, but this year it’s been going at a bit of a rip. I think it’ll hit an all-time high this year. I’m projecting about a 30%-plus return over the next 12 months for this one. Very happy with it.

Despite, well, if you would say, “Well, what are the negatives?” I’d say, “Well, on a discounted cash flow basis, it’s overvalued.”

And I’d say the reason it looks slightly overvalued on discounted cash flow is the market is projecting lower cash flows than I think it will achieve, lower earnings than I think it will actually achieve… because I think the market is underestimating the money coming from AI, semiconductor demand and so on.

We saw that with Nvidia. The market got it so wrong, the stock jumped up 25%. The market basically got it wrong by a quarter of a trillion dollars in market cap of Nvidia. And I think for companies like this, the market’s just not able to take on board how quick this growth is and how big it is, and that’s really my play over here.

Of course, if you look at the return histogram, the statistical analysis of the range in which it could flow… well, it’s a tech stock, so it could drop within 12 months, 20%, 30%.

So be aware of that, because tech stocks are volatile. Even the mighty Microsoft fell over 20% last year. So just be aware of that. Doesn’t necessarily mean they’re a bad company, it’s just the nature of the beast, the nature of volatility is like that.

Okay, I hope you’ve liked this. I hope it’s been informative. Excuse the background noise. I hope you can nevertheless manage to hear me. I hope you are enjoying some of the sunshine through me, at least, if it’s not sunny where you are.

Thank you all very much.