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As an analyst, writer, and stock picker for the last 25 years, this is my third significant bear market. I’ve seen plenty of investors and colleagues get burned trying to bottom fish or otherwise time the lows of a bear market, cautions Brit Ryle, editor of The Profit Sector.

It is so easy to see a stock that’s down 50% and think, “Oh, that’s a bargain.” Of course, you know what happens next. Don’t worry, I’ve done it, too. And that’s why I want to tell you that there is only one kind of stock that can be successfully bought during a bear market — the stock of a company that is demonstrating breakout earnings. 

Most companies barely grow during bear markets. Only a precious few companies can manage to post significant growth during a bear market. And my favorite stock for 2023 is among the precious few. 

Aehr Test Systems (AEHR) makes test systems that make sure semiconductors work like they are supposed to before they are shipped out of the factory. It’s a critical and underappreciated aspect of the semiconductor fabrication process.

Aehr is of particular interest because they make test systems for silicon carbide (SiC) chips, which are much different than regular silicon chips. For one, because silicon carbide chips are harder to make, the failure rate is higher. And so the testing process is more rigorous.

And two, because silicon carbide chips can operate at much higher temperatures (up to 200 degrees celsius), they are the go-to chip for the entire electric vehicle (EV) market. Demand for silicon carbide chips is off the charts, expected to grow at a ~150% clip a year for the next 5 years, at least.

So, test equipment for silicon carbide chips is growing at an explosive rate, too. This is why, delivered back on October 7, Aehr Systems’ third-quarter earnings report was a barnburner. The company brought in $10.7 million in revenue for the third quarter, 88% better than the prior year. Analysts were expecting $8.5 million in revenue.

Earnings per share came in at $0.05 vs expectations of $0.01. That is simply a massive, massive beat. And the stock rallied 23% on October 8th, a day the Dow was pounded lower by over 500 points. 

In a press release, the CEO said the company had $19.5 million in bookings. Those bookings had come during the just-ended third quarter. That’s a new business, and Aehr will certainly fill those orders during its next few quarters. 

But get this: Despite the massive earnings beat last quarter, and that $19.5 million in new orders, the company did not raise its earnings guidance for the full year. That means that more earnings beats are coming over the next few quarters. Aehr shares are going a lot higher. I have a one-year price target of $45.
 

About the Author

Briton Ryle has been sharing his insight, analysis, and stock pick with individual investors for 25 years. You can catch up with his latest work at The Profit Sector.

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