To The Moon

$Lam Research(LRCX)$

Today, we're analyzing Lam Research Corp (Ticker: LRCX). As always, this is not individual investing advice—just how I analyze stocks.

About the Cyclical Investors Club

A viewer recently pointed out that the name Cyclical Investors Club doesn’t quite align with the type of analysis I’ve been doing lately—and they were right. When I first started analyzing stocks nearly a decade ago, I focused on identifying high-quality deep cyclical businesses and determining good entry points. That’s how I got my start, and when I launched the Cyclical Investors Club in early 2019, I named it based on that focus.

However, over the years, I’ve expanded my approach significantly. While I still analyze deep cyclical stocks, they now make up only about 20% of my portfolio. Part of this shift is due to market conditions, but another reason is simply the limited number of high-quality, deeply cyclical businesses. Many companies have made efforts to reduce their cyclicality, and I estimate that only about 100 publicly traded companies fit the "quality deep cyclical" criteria. That’s a pretty small universe of stocks.

To broaden my scope, I’ve developed additional strategies and now track roughly 700 stocks—both those that pass my initial screens and others frequently requested by viewers. Since 2019, my stock coverage has expanded more than tenfold.

Analyzing Lam Research (LRCX)

Lam Research operates in the semiconductor equipment industry. With a market cap of over $100 billion, it’s a major player.

To determine whether a stock is cyclical, I start by reviewing its earnings history. Most semiconductor businesses—probably 9 out of 10—are deeply cyclical, but I still prefer to analyze each stock individually.

Looking back at the Great Recession (2008-2009), we see that Lam’s earnings went completely negative. Generally, if a company's earnings decline by more than 50% and then recover, I classify it as deeply cyclical. In Lam’s case, earnings dropped by over 100% during that downturn, then rebounded, forming a clear cycle.

Lam faced another earnings decline a few years later, taking about five years to recover—more typical of a cyclical stock.

Cyclical Patterns & Secular Growth

While Lam Research remains a cyclical business, the semiconductor industry is in a different position today compared to 2008. There’s now a secular growth trend driving demand.

We still see downturns—such as in 2019 and again last year (earnings fell 11%)—but these cycles have been shallower compared to the past. The challenge with deep cyclical stocks is that when earnings turn negative, the P/E ratio becomes unreliable or even nonexistent. In some cases, when a stock appears "cheap," the P/E ratio may still look high due to earnings fluctuations.

Understanding these cycles and combining them with fundamental analysis is key to making informed investment decisions.

When analyzing cyclical stocks, it’s important to understand how the P/E ratio behaves. When these stocks are cheap, the P/E ratio might appear high due to declining earnings. On the other hand, right before a downturn, the P/E ratio often looks low—for example, around 12 before past crashes. This can be misleading because once earnings start dropping, the P/E ratio rises, signaling a down cycle.

A key pattern to watch is that the market tends to anticipate downturns about a year or two in advance. This means that stock prices can begin falling before earnings take a hit. Recognizing these cycles is crucial for making informed buy/sell decisions.

Balancing Cyclicality with Secular Growth

Lam Research operates in a deeply cyclical industry, yet it benefits from a secular growth trend in semiconductors. My approach remains the same—I analyze the cyclicality but apply judgment to factor in long-term trends.

The good news is that Lam’s earnings cycles are improving over time:

Each new cycle reaches higher highs, The lows are getting higher, signaling resilience, Recovery times are relatively quick.

Stock Price Drawdowns Over Time

Because earnings can be volatile, another way to assess cyclicality is by analyzing historical drawdowns in the stock price.

Past drawdowns include:

• 1991: ~75% decline

• 1998: ~80% decline

• Dot-com crash: ~90% decline

• Great Recession (2008-09): ~75% decline

• 2018 Semiconductor Downturn: ~40% decline (saved by Fed rate cuts)

• 2022 Semiconductor Slump: ~55% decline

Even as recently as three years ago, Lam Research saw a 55% drop—confirming that cyclical is still present in the stock price, even if earnings cycles are moderating.

Investment Strategy for Cyclicals

my approach is Buy when the stock is down 50-60% from its highs, Sell when the stock makes new highs, Aim for at least a 100% return (which typically results in a 15% CAGR over five years).

For example, in a similar situation, I bought AMD during a downturn, and once the stock recovered and approached new highs, I sold half my position—locking in gains.

However, the challenge with cyclicals is that they can drop suddenly without warning. Investors who bought Lam Research near its peak saw the stock fall 30% in just one month, often with no clear warning signs. This is why understanding historical drawdowns and having a disciplined entry/exit strategy is critical when investing in cyclical stocks.

Understanding Cyclical Stocks & Avoiding Common Mistakes

Many investors misunderstand cyclical stocks, particularly their volatility. A 30% decline in a stock like this is not significant—it’s just part of the cycle. However, inexperienced investors often:

• Buy too early, thinking a small dip is a buying opportunity

• Hold or buy near the top, expecting steady earnings growth

For example, investors may see earnings projections of 20-24% growth and assume that trend will continue. But they fail to account for the years when earnings plummet by 65% or more. This over-extrapolation leads to buying at the wrong time.

My Approach to Buying Cyclicals

The key for me is to only buy during a significant drawdown—at least 50% off the highs—and use historical patterns as a guide. If it’s a high-quality business, history suggests it will recover, but patience is required.

How Deep Could It Fall?

Looking at past drawdowns helps set expectations:

• 2001 tech crash: 84% drop

• 2008 financial crisis: 68% drop

• 2020 COVID crash: 43% drop

• 2022 semiconductor downturn: 55% drop

The secular growth trend in semiconductors has helped reduce the depth of some declines, but the 55% drawdown in 2022 happened without a recession. If a recession were to hit, we could see a fall similar to 2008—or even deeper.

Why Buying After a 50% Drop Isn’t Always Safe

A common mistake is assuming that if a stock has already fallen 50%, the worst is over. But if the total drawdown reaches 75%, you don’t just lose another 25%—you lose 50% of your investment from that 50% level.

🔹 Example: A stock peaks at $100

• A 50% drop brings it to $50

• A 75% total decline takes it to $25

• If you bought at $50, you still lose 50% when it falls to $25

This is why timing matters, even for high-quality cyclical stocks.

Conclusion

My Buy Strategy for Lam Research - Step 1: Buy after a 50% drawdown ($54.39), Step 2: Buy more after a 70% drawdown ($33.90) Given the stock’s history, I expect a deeper decline in a recession scenario, especially considering its peak P/E ratio was much higher than in 2008. However, I also recognize that unexpected factors—government stimulus, AI growth, global policies—could shorten the down cycle. Why This Strategy Works, If the stock eventually recovers to its previous highs, the returns can be massive, Buying at $30 and returning to $100 = 233% gain, Even if it takes years, that’s still a great long-term return, The key is to be patient, buy at the right levels, and accept volatility as part of the game.

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Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.