NEW YORK (TheStreet) -- The wave of mergers and acquisitions in the semiconductor industry (Intel  (INTC) and Altera (ALTR), Broadcom (BRCM) and Avago Technologies (AVGO), to name a few) means that the surviving firms will be bigger with lower costs and streamlined research and development expenditures. This trend is great news for Altera's shareholders, for instance: they are getting $54 per share, 56% higher than the stock price on March 27, 2015, according to the Wall Street Journal. 

It also means that the combined firms will be able to improve their profit margins at the expense of their suppliers and clients due to a better bargaining position after the mergers.

That being said, this could put the suppliers of equipment to the semiconductor industry under pressure. Fewer, larger customers could put pressure on margins.

Despite that bad overarching trend, there are still companies in this sub-industry that can be good investments. Here are a few you should buy, according to TheStreet Ratings, TheStreet's proprietary ratings tool. 

TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

Check out which semiconductor equipment companies made the list. And when you're done, be sure to read about which semiconductor stocks to buy now. Year-to-date returns are based on June 1, 2015, closing prices. The highest-rated stock appears last.

 

AEIS ChartAEIS data by YCharts
3. Advanced Energy Industries, Inc. (AEIS)

Rating: A
-
Market Cap: $1.2 billion
Year-to-date return: 23.1%

Advanced Energy Industries, Inc., together with its subsidiaries, designs, manufactures, sells, and supports power conversion and control products that transform power into various usable forms. The company operates through two segments, Precision Power Products and Inverters.

"We rate ADVANCED ENERGY INDS INC (AEIS) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, revenue growth and largely solid financial position with reasonable debt levels by most measures. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Powered by its strong earnings growth of 48.57% and other important driving factors, this stock has surged by 46.00% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, AEIS should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • ADVANCED ENERGY INDS INC has improved earnings per share by 48.6% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, ADVANCED ENERGY INDS INC increased its bottom line by earning $1.14 versus $0.78 in the prior year. This year, the market expects an improvement in earnings ($1.95 versus $1.14).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Semiconductors & Semiconductor Equipment industry. The net income increased by 44.6% when compared to the same quarter one year prior, rising from $14.72 million to $21.28 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 0.8%. Since the same quarter one year prior, revenues slightly increased by 0.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • AEIS has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. To add to this, AEIS has a quick ratio of 2.49, which demonstrates the ability of the company to cover short-term liquidity needs.

TER ChartTER data by YCharts
2. Teradyne, Inc. (TER)

Rating: A
-
Market Cap: $4.6 billion
Year-to-date return: 7.2%

Teradyne, Inc. provides automatic test equipment worldwide.

"We rate TERADYNE INC (TER) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, increase in net income, good cash flow from operations and expanding profit margins. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • TER's revenue growth has slightly outpaced the industry average of 0.8%. Since the same quarter one year prior, revenues slightly increased by 6.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • TER has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 3.56, which clearly demonstrates the ability to cover short-term cash needs.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Semiconductors & Semiconductor Equipment industry. The net income increased by 3429.3% when compared to the same quarter one year prior, rising from $0.93 million to $32.79 million.
  • Net operating cash flow has significantly increased by 245.35% to $37.53 million when compared to the same quarter last year. In addition, TERADYNE INC has also vastly surpassed the industry average cash flow growth rate of 20.26%.
  • The gross profit margin for TERADYNE INC is rather high; currently it is at 61.85%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 9.57% trails the industry average.

LRCX ChartLRCX data by YCharts
1. Lam Research Corporation (LRCX)

Rating: A

Market Cap: $13.2 billion
Year-to-date return: 5.1%

Lam Research Corporation designs, manufactures, markets, refurbishes, and services semiconductor processing systems used in the fabrication of integrated circuits.

"We rate LAM RESEARCH CORP (LRCX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, solid stock price performance, impressive record of earnings per share growth and compelling growth in net income. We feel its strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 0.8%. Since the same quarter one year prior, revenues rose by 13.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The current debt-to-equity ratio, 0.45, is low and is below the industry average, implying that there has been successful management of debt levels. Along with this, the company maintains a quick ratio of 2.88, which clearly demonstrates the ability to cover short-term cash needs.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 33.40% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, LRCX should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • LAM RESEARCH CORP has improved earnings per share by 20.8% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, LAM RESEARCH CORP increased its bottom line by earning $3.68 versus $0.67 in the prior year. This year, the market expects an improvement in earnings ($5.01 versus $3.68).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Semiconductors & Semiconductor Equipment industry. The net income increased by 25.5% when compared to the same quarter one year prior, rising from $164.40 million to $206.29 million.
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