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Dow Jones S&P 500 NASDAQ 10-Year Note
10,318.16 1,091.38 2,146.04 33.56
Oil *
77.53
DOWN
14.28
DOWN
3.52
DOWN
10.78
UP
0.07
10 Yr
3.36%
SPDR Gold
112.94
-0.14%
-0.32%
-0.50%
+0.21%
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Commentary: Wrong! Tactics and Strategies
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Valuing the SOX: KLA-Tencor
By James J. Cramer

3/16/01 9:35 AM ET


Read More
Click here for the latest from James J. Cramer.
Editor's note: This is the fifth installment of a multipart series on semiconductor stocks. Please check out Part 1, Part 2, Part 3 and Part 4!

KLA-Tencor (KLAC:Nasdaq - news - boards) is the perfect stock to buy if you think the cycle is about to take off. The company provides an integrated system to measure problems with manufacturing of semiconductors. I never knew how important this was until I visited an Intel (INTC:Nasdaq - news - boards) wafer factory in Israel and was blown away by how important it is to get yields right.

P/E Data Ranked Over Time
KLA-Tencor (KLAC)
RANK DATE P/E ****
Lowest P/E 1 7/19/96 10.78
2 3/8/96 10.99
3 1/9/98 16.79
4 10/9/98 19.08
5 3/15/01 21.01 YESTERDAY
6 10/7/94 27.52
Highest P/E 7 6/13/97 32.80
8 2/26/99 62.43
The list is sorted from lowest P/E to highest, with yesterday's P/E highlighted

Yields are a ratio of semiconductors thrown away to semiconductors that are good to go. When a new product line starts up, most of the chips that are produced aren't any good. The goal is to get them to be flawless as fast as possible.

So Intel is most likely throwing away a lot of the P4 chips they are making right now. It will continue to do so until it gets the runs right. Then the yields climb dramatically. And so does the profit. KLA makes that happen as fast as possible. When there is tremendous demand for chips and when you need to get those yields up as high as possible as fast as possible, you need a ton of KLA products. Unfortunately, we are not in that zone right now. Chip companies are facing declining demand and don't need to ramp up as fast as they would have even as recently as a year ago.

Because this demand drop-off is so sudden, I think you haven't seen the full brunt of order reductions at KLA yet. While the stock seems cheap, and it has been buying back shares -- a rarity for a tech company -- we still have further to wait before we can buy this great semiconductor equipment manufacturer and be sure we won't lose money immediately.

Ideal Entry and Exits on the SOX Index
Overlayed on KLAC's P/E and Price
Source: Bloomberg

SOX Index
 KLA-Tencor (KLAC)
Date Index Price P/E Ratio Price to Sales
Currently, this is where we are this week. On 3/15/01 the SOX is at 571.41 and Kla-Tencor was at: $41.19 21.01 3.79
A great Exit on the weekly SOX chart would have been 3/10/00 when the Index was at 1332.73 At the time, Kla-Tencor was at: 91.13 130.18 15.47
A great Entry on the weekly SOX chart would have been 2/26/99 when the Index was at 356.26 At the time, Kla-Tencor was at: 25.91 62.43 4.84
A great Exit on the weekly SOX chart would have been 1/29/99 when the Index was at 420.45 At the time, Kla-Tencor was at: 28.88 69.58 5.39
A great Entry on the weekly SOX chart would have been 10/9/98 when the Index was at 200.8 At the time, Kla-Tencor was at:: 12.50 19.08 2.02
A great Exit on the weekly SOX chart would have been 2/27/98 when the Index was at 316.43 At the time, Kla-Tencor was at: 23.08 22.30 3.35
A great Entry on the weekly SOX chart would have been 1/9/98 when the Index was at 248.9 At the time, Kla-Tencor was at:: 17.38 16.79 2.52
A great Exit on the weekly SOX chart would have been 8/22/97 when the Index was at 391.62 At the time, Kla-Tencor was at: 37.31 41.92 6.04
A great Entry on the weekly SOX chart would have been 6/13/97 when the Index was at 294.86 At the time, Kla-Tencor was at: 23.13 32.80 2.26
A great Exit on the weekly SOX chart would have been 1/31/97 when the Index was at 288.73 At the time, Kla-Tencor was at: 21.31 26.81 2.03
A great Entry on the weekly SOX chart would have been 7/19/96 when the Index was at 152.71 At the time,Kla-Tencor was at: 9.81 10.78 0.94
A great Exit on the weekly SOX chart would have been 5/17/96 when the Index was at 212.57 At the time, Kla-Tencor was at: 14.75 13.59 2.40
A great Entry on the weekly SOX chart would have been 3/8/96 when the Index was at 172.71 At the time, Kla-Tencor was at: 10.94 10.99 1.97
A great Exit on the weekly SOX chart would have been 8/18/95 when the Index was at 293.79 At the time, Kla-Tencor was at: 21.94 36.87 4.86
A great Entry on the weekly SOX chart would have been 10/7/94 when the Index was at 122.72 At the time, Kla-Tencor was at: 11.63 27.52 3.87
*The determination of these dates and prices were made by identifying optimum entry and exit points on an historical graph of the SOX using weekly closing prices.

James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to jjcletters@thestreet.com.
Send letters to the editor to letters@realmoney.com.
Read our conflicts and disclosure policy.
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Dow Jones S&P 500 NASDAQ 10-Year Note
10,318.16 1,091.38 2,146.04 33.56
Oil *
77.53
DOWN
14.28
DOWN
3.52
DOWN
10.78
UP
0.07
10 Yr
3.36%
SPDR Gold
112.94
-0.14%
-0.32%
-0.50%
+0.21%
Data delayed 20 minutes