These 3 Momentum Stocks Still Have Plenty of Room to Run

Key Concepts

• AI Trade: Investment focused on companies benefiting from the growth of Artificial Intelligence.
• Capital Expenditure (Capex): Funds used by a company to acquire, upgrade, and maintain physical assets such as buildings, machinery, and equipment.
• Semiconductor Equipment Names: Companies that manufacture the tools and machinery used to produce semiconductors.
• Power Gauge (Chicken Analytics): A proprietary system used to analyze stock performance and identify potential investment opportunities.
• Relative Strength: A measure of a stock's price performance compared to other stocks or a market index.
• Consolidation (in trading): A period where a stock price trades within a narrow range, indicating a pause in the prevailing trend.
• Bonus Depreciation: A tax incentive allowing businesses to deduct a large percentage of the cost of new assets in the year they are placed in service.
• Hyperscalers: Large-scale cloud service providers (e.g., Microsoft, Google, Amazon).
• Volatility: The degree of variation of a trading price series over time.

Applied Materials (AMAT) – A Case Study in Momentum

Pete Carmino presented Applied Materials (AMAT) as a successful case study demonstrating the potential of following momentum, even near all-time highs. Discussed on the channel in October 2023 around the $220 range, AMAT has since increased by $100, driven by the AI-fueled capital expenditure cycle. The initial surge in demand benefited major semiconductor companies like Nvidia and AMD, but subsequently extended to equipment manufacturers like Applied Materials. Despite some concerns about valuations, Carmino believes AMAT still has growth potential, fueled by ongoing tailwinds in the AI sector. The October 23rd video detailing the initial analysis is recommended for further insight. The key takeaway is that identifying and capitalizing on momentum in AI-related stocks can yield significant returns, even when a stock appears “expensive” based on traditional valuation metrics.

The Broader AI Investment Landscape & Analyst Perspectives

Carmino highlighted a significant investment trend driven by a pro-business administration offering tax incentives for capital expenditure, particularly in AI. Last year’s spending across major players (Microsoft, Google, Amazon) totaled approximately $400 billion, with estimates for the current year ranging from $500-550 billion. He noted that analysts often adopt a conservative approach, potentially overlooking or labeling certain sectors as “overbought.” However, the underlying investment trends and tax incentives support continued growth. The 100% bonus depreciation deduction allows companies to immediately reduce their tax burden on capital investments, incentivizing further spending. He emphasized the importance of understanding the business rationale behind these investments, particularly the certainty provided by the tax incentives.

Three Momentum Stocks with Potential

Carmino presented three stocks exhibiting strong momentum with potential for further growth:

1. Onto Innovation (ONTO): A quality control company for semiconductors, trading around $220. ONTO has experienced a recent surge, mirroring Applied Materials’ earlier trajectory. Its relationship with Taiwan Semiconductor, a major chip manufacturer, is a key driver. The increasing demand for chip production necessitates robust quality control, positioning ONTO to benefit. The stock demonstrated resilience even during Tuesday’s market pullback, remaining in the green, indicating strong momentum. A 5-year chart reveals that ONTO has not yet reached its all-time high, suggesting further upside potential.

2. Advanced Micro Devices (AMD): AMD experienced a breakout around mid-summer 2023, trading around $120-$130. After a significant gap up in October, it consolidated in a tight range, providing a potential entry point. Carmino noted a relative strength breakout in the Chicken Analytics system. While overshadowed by Nvidia, AMD operates in a similar space and is poised to benefit from continued demand.

3. On Semiconductor (ON): Trading in a range between $41 and $61, ON is positioned as a later-stage beneficiary of the AI data center buildout. It operates in the power semiconductor layer, typically lagging GPU orders by a phase. Analyst ratings are currently slightly behind the stock’s performance, suggesting potential for upgrades and further growth. The company is expected to gain visibility as data centers complete construction, potentially driving increased demand in 2026.

Navigating Market Volatility

Carmino views market volatility as an opportunity, emphasizing the importance of using technical indicators to assess long-term trends and identify potential entry points during pullbacks. He cautioned against overreacting to short-term geopolitical noise, focusing instead on fundamental factors like tax incentives and the growth of AI. He suggested using a partial position strategy to gain exposure while mitigating risk and maintaining attention on the stock.

The Power Gauge & Further Research

Carmino highlighted the Power Gauge system developed by Chicken Analytics as a valuable tool for analyzing these stocks. He offered viewers a free look at the Power Gauge’s assessment of the three discussed companies via a QR code and link in the description. He also referenced a recent interview with Mark Shaken discussing the investment potential of the MAG7 stocks and their data center buildout.

Conclusion

The discussion underscored the potential for significant returns by identifying and capitalizing on momentum in the AI sector, even in stocks trading near all-time highs. The key takeaways include the importance of understanding underlying investment trends, leveraging tax incentives, and utilizing technical analysis to navigate market volatility. The three presented stocks – Onto Innovation, AMD, and On Semiconductor – represent compelling opportunities for investors seeking exposure to the ongoing AI-driven capital expenditure cycle. The Power Gauge system and further research, including the referenced videos, are recommended for a more comprehensive understanding of these investment opportunities.