Lam Research (LRCX) is set to report earnings after the closing bell on Wednesday. The stock has been on a great run over the past year, gaining over 235% off of its low last March, but the stock has dropped a little over the last two weeks.

The current consensus estimate is for earnings of $6.60 per share and that is 65.8% higher than the $3.98 the company reported in the same quarter last year. Revenue is expected to come in at $3.69 billion and that is up 47.4% from last year.

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Lam Research has seen strong earnings and revenue growth in recent quarters. In the most recent quarterly report earnings jumped 51% over the previous year and revenue jumped 34%. Those figures are significantly higher than the growth rates we’ve seen over the last three years. Earnings have only grown by an average of 4% per year over the last three years while revenue has increased by 1% per year during that same stretch.

While the growth figures are impressive, the profitability measurements may be even more impressive. The return on equity is extremely high at 48.2% and the profit margin is well above average at 26.2%.

Looking at the revenue growth, the profit margin, and the ROE, we see why Lam Research gets a good score on the SMR rating from Tickeron. The company gets a score of 20 in the category and that is one of four positive fundamental indicators on the fundamental screener.

We see on the screenshot that Lam gets great scores in the Profit vs. Risk rating and the Price Growth rating. It gets a really good score on its valuation rating as well. The only negative marks are in the Outlook rating and the Seasonality Score.

Lam’s P/E ratio is somewhat low compared to other companies in the semiconductor equipment industry. Lam’s trailing P/E is at 30.9 and the forward P/E is 25.3 where the industry averages are 36.6 and 32.9. Lam’s forward PEG ratio is also lower than the industry average at 1.55. The only area where the company is valued slightly higher than the average is the price/book ratio. Lam’s reading is 16.2 and the industry average is only 4.9.

Overall, the fundamental picture for Lam is really good. We’ve got strong earnings and revenue growth in recent quarters and that growth is expected to continue throughout the year. The profitability measurements are really good and the valuation is pretty good when compared with its competitors.

Trending Higher Within a Channel

After bottoming in March ’20, Lam Research has been trending higher and a channel has formed that helps define the various cycles within the overall upward trend. The stock hit the upper rail of the channel two weeks ago and now with the move lower in the last few weeks it is back in the middle of the channel.

The 13-week moving average is almost dead in the middle of the channel and it could provide temporary support if the stock continues to drop.

The overbought/oversold indicators are a bit of a concern at this point in time. The 10-week RSI hit overbought territory a few weeks ago and has now turned lower. The weekly stochastic indicators were above the 90 level and the selling over the last few weeks has caused the indicators to make a bearish crossover.

Personally, I wouldn’t mind seeing the stock make a move lower like we saw last summer when the stock was up near the upper rail and then moved down over the course of six weeks. That move helped form the lower rail of the channel and it was the last time the RSI and the stochastics were below the 50 level. I think if we were to see a similar move over the next month, it would provide investors with a great buying opportunity.

Mixed Messages from Analysts, Options Traders, and Short Sellers

Sentiment toward Lam Research presents us with some different messages at this time. Analysts are pretty bullish on the stock and short-sellers seem to be shying away, but options traders are more bearish toward the stock than they are the average stock. I view the sentiment indicators in a contrarian manner and I believe it needs to be viewed in context.

There are 26 analysts covering the stock at this time with 21 “buy” ratings, four “hold” ratings, and one “sell” rating. This gives us a buy percentage of 80.8% and that is higher than the average buy percentage. The average stock’s buy percentage falls in the 65% to 75% range.

Lam’s short-interest ratio is at 1.38 currently and that is below average. Like the analyst's ratings, the low short interest ratio suggests that investors are more bullish on the stock than they are on the average stock. The short interest ratio has only been above 3.0 (average) on a few occasions over the past year. Given the strong fundamentals and the big rally for Lam, I think the above-average bullish sentiment from analysts and short-sellers is warranted.

Option traders are sending a different message though. There are currently 51,966 puts and 36,106 calls open going through January of next year. This gives us a put/call ratio of 1.44 and that is well above the average which falls in the 0.9 to 1.1 range. A put/call ratio reflects more bearish sentiment. Looking back to January 27 when Lam Research last reported earnings, the put/call ratio was only 1.01. The shift to a higher ratio suggests that bearish sentiment is growing in the options market.

The overall outlook for Lam Research is good. The fundamentals are strong and the stock is trending higher. The short-term picture could be a little muddled with the overbought readings on the weekly chart, but a few more weeks of selling could move the stock down to the lower rail of the channel and will move the OB/OS indicators below the 50 level.

The sentiment indicators reflect what I would expect for the most part. The buy percentage and the short-interest ratio suggest that Lam is an above-average stock—which it seems to be. The put/call ratio is a little surprising, but it could be a matter of investors being cautious ahead of the earnings report. Long term, I look for Lam to continue moving higher and would view the $550-$570 range as an opportunity to buy the stock or add to an existing position.