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Don't Overlook This Fast-Growth Industry

Don't Overlook This Fast-Growth Industry

David Silver: The fast-growing electronic materials industry is an under-researched sector enjoying fast growth, record profitability, and secular tailwinds.

The sector provides the gas mixtures, chemical formulations, specialty materials, equipment, and packaging that facilitate the production of leading-edge semiconductors and other microelectronics underlying the proliferation of mobile devices, laptops, cloud computing, and the "Internet of Things."

Sturdy economic moats are built on both the patented and proprietary products they create, as well as their long history of successful collaboration with the world's largest chipmakers and semiconductor equipment manufacturers. One caveat: They serve a powerful, concentrated customer base, which limits their pricing power and operating flexibility.

Among the handful of well-run stocks in the group are mid-caps Entegris and Versum Materials. We slightly prefer Entegris here due to greater product breadth and more experienced management.

For investors who prefer large caps, there will soon be an interesting new investing option: DowDuPont is planning to de-merge into three separate companies by March 2019. One spin-off will hold the combined electronics and electronic materials businesses of both companies. This new company will become both the world's largest electronics materials supplier.

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About the Author

David Silver

Senior Equity Analyst

David Silver, CFA, CPA, is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers diversified industrials, including producers of industrial gases, engineering and construction services, electronic materials, pumps and valves, and professional staffing.

Before joining Morningstar in 2014, Silver spent approximately 20 years covering the chemicals sector as a sell-side analyst for Merrill Lynch, J.P. Morgan Securities, Credit Suisse, and Wertheim Schroder.

Silver holds a bachelor’s degree in accounting and finance from The Wharton School of the University of Pennsylvania and a master’s degree in business administration, with a major in finance, from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst® designation and is a Certified Public Accountant.

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