Verdict: KEEP

LR: 1.0 | No signal to remove. Market is approximately right. One of the strongest names in the selectable set.

Company

KLA Corporation. $189.6B market cap. Semiconductor process control and yield management — inspection, metrology, advanced packaging. Dominant position: ≈50% share in advanced packaging inspection (up from 10% in 2021). Fiscal year ends June 30.

QQQ weight: 1.10% (rank ≈24, solidly in selectable set).

Relative Performance vs QQQ

6-month:  KLAC +36.0% vs QQQ -5.9%  = +41.9% excess
3-month:  KLAC +12.9% vs QQQ -9.8%  = +22.8% excess
1-month:  KLAC -5.3%  vs QQQ -7.7%  = +2.3% excess
15-day:   KLAC +1.0%  vs QQQ -7.4%  = +8.4% excess

Excess Sharpe (6mo): 2.10

KLAC is one of the strongest relative performers in the selectable set across every timeframe. Removing this name actively hurts the basket.

Factor Decomposition (trailing 250d)

SPY     beta = -0.84
MTUM    beta = +0.75
XLK     beta = +1.36

Variance attribution:
  XLK    56.4%
  MTUM   25.5%
  SPY   -22.5%  (offset — absorbed by XLK)
  Idio   40.6%

alpha = +51.7% annualized
sigma_idio = 31.2%
R² = 59.4%

Idio variance 41% — below the 75% target. KLAC is predominantly a tech/momentum play. But for filtration this is neutral: QQQ itself is a tech/momentum basket. No factor mismatch to exploit. XLK beta of 1.36 amplifies QQQ symmetrically — no directional edge. Contrast with our factor-mismatch removes: CEG (XLU beta 1.12), SBUX/CMCSA (negative momentum).

Trailing idio alpha of +51.7% annualized reflects the advanced packaging / HBM story materializing over the past year.

Quarterly Financials (10-Q, GAAP)

*Q2 FY25 depressed by $239.1M goodwill impairment charge.

Revenue sequential growth: -0.5%, +3.7%, +1.1%, +2.7% — steady, not accelerating. Gross margin stable at 60.3-62.0% over five quarters despite tariffs. 10-Q margin bridge shows Q2 FY26 improved YoY by +110bp from mix (+40bp), volume (+10bp), manufacturing efficiency (+20bp), net other (+40bp). Q3 FY26 guided 61.75% — within the 5-quarter range.

What Consensus Is Actually Modeling

Q3 FY26 (Apr 29 Earnings)

The guide midpoint is ≈$9.08 (calculated from transcript components: $3.35B rev x 61.75% GM - $645M opex - $25M other x 85.5% after-tax / 131.7M shares). Consensus at $9.17 means the Street is already pricing in a beat. But the beat cadence has collapsed:

Q3 FY25: +4.0%  →  Q4 FY25: +9.7%  →  Q1 FY26: +2.2%  →  Q2 FY26: +0.6%

Analysts have caught the sandbagging. A guide-match now equals a consensus miss.

WFE Market — Tight Consensus Across Peers

Universal agreement. No differentiated view available.

Key Assumptions the Street Is Modeling

H1/H2 cadence. CFO Higgins: "March probably low point year." H2 sequential growth "high single maybe low double digit." This is the consensus base case — Q3 is the trough, then acceleration. Everyone models this.

Gross margin bridge. CY2026 full-year: ≈62% +/-50bp. DRAM cost headwind 75-100bp ("closer to top end range today"). Offset by mix, volume, efficiency. Management calls it "transitory" — expects normalization as capacity comes online. Long-term target 63% (Investor Day). Street models headwind resolving by H2.

Supply constraints. "Virtually sold out most products" for H1. Lead times long — H1 decisions made in 2025. H2 has "more flexibility." Confirmed by ASML (20% more process control needed at leading nodes), LRCX (H2 "robust growth" across all device segments).

Service revenue. 12-14% growth target. Q2 beat came from "stronger than modeled service performance." Street now models higher service — less room to beat on this line.

Advanced packaging. TAM ≈$12B, KLAC ≈50% share, growing "similar rate" to core WFE. But Higgins noted customers "frustrated shelves" — fab shell availability constraining installations. 2026 is capped; 2027 is the real acceleration. Street has absorbed this.

China. 33% of FY25 revenue (annual), declining. H1 FY26: 34.8% vs 38.7% prior year. Export controls tightening gradually. Street models slow decline. Tail risk is step-function BIS rule change.

Analyst coverage. 31 analysts. 19 Buy, 12 Hold, 0 Sell. Mean target $1,676 (+16%). No dissent. Recent actions (last 30 days): Needham $1,800, Jefferies $1,700, Oppenheimer $1,900, Morgan Stanley $1,809.

Where Consensus Could Be Wrong

Four places where the market could be mispricing. None are tradeable.

1. Beat Cadence Exhaustion

The beat cadence collapsed from 9.7% to 0.6% over three quarters. Consensus at $9.17 vs guide ≈$9.08 means the Street bakes in a 1% beat that may not come. If KLAC merely meets guide, that's a consensus miss.

Why it's not tradeable: "Virtually sold out" puts a floor under revenue. The miss, if it comes, is on margin, not top line. A 1% EPS miss at 30x forward is -3% to -5% on the stock, absorbed in a day. Not enough for a filtration remove.

2. DRAM Margin Headwind Persistence

Management says 75-100bp gross margin drag is "transitory." Street accepts this. If DRAM pricing pressure persists because HBM demand keeps component costs elevated, the 63% long-term target gets pushed out. Worth ≈$2.40/share in perpetuity at current margins.

Why it's not tradeable: Margins have been stable at 60.3-62.0% for 5 quarters — the headwind is being offset by mix and efficiency in real time. Until margins break below 60%, the data supports management's framing.

3. H2 Acceleration Disappointment

The consensus linchpin: H2 sequential growth "high single maybe low double digit." Depends on optical component supply unlocking. If supply chain investments from last summer produce less capacity than expected, H2 could be mid-single instead.

H2 "high single" (8%):  Q4 rev ≈$3.62B, CY2026 ≈$13.8B
H2 "mid single" (5%):   Q4 rev ≈$3.52B, CY2026 ≈$13.6B
Difference: ≈$200M rev, ≈$0.90 EPS

Why it's not tradeable: KLAC, LRCX, ASML, ONTO all confirm robust H2 demand and supply chain investment. Management: "pretty good confidence as out into 2027." Equipment companies don't say that when their supply chain is breaking.

4. Advanced Packaging Shell Constraint

Customers "frustrated shelves." Fab shell availability caps 2026 installations. KLAC guides packaging growing "similar rate" to core WFE, but real acceleration deferred to 2027. If shell delays are worse than modeled, ≈$500M-$1B revenue shortfall on the highest-margin segment.

Why it's not tradeable: Management already baked this constraint into their "mid-single digits" CY2026 growth guide. The Street isn't modeling unconstrained packaging growth. The "2027 is bigger" message has been absorbed.

Edge Assessment

No edge. $190B market cap. 31 analysts. 0 sells. Every bull and bear point above is consensus-known. No informational asymmetry. The advanced packaging / HBM story is in every sell-side note. China risk is in every risk factor section.

Counterparty test: If we remove KLAC, who is the uninformed seller we're exploiting? Nobody. Every informed participant owns this thesis. Edge = zero.

For filtration: No edge means the market is approximately right, which means benchmark weight is correct. We only remove when we can identify WHY a name will lag QQQ in our window. KLAC has outperformed QQQ by +41.9% over the last 6 months with no signs of reversal.

Earnings Decision Gate: April 29

Within our 15-week window. Consensus $9.17 non-GAAP EPS. Revenue ≈$3.37-3.40B.

Beat cadence narrowing, but supply constraints provide a floor. The risk is margin miss (DRAM costs + tariffs) or conservative H2 guidance.

Miss probability: ≈15-20%. Four straight beats, supply-constrained production, secular tailwinds. Management guided Q3 margin specifically (61.75%), signaling good visibility.

If miss + guide-down on H2: Stock drops 5-10% on high beta. Reconsider for removal at that point. Otherwise: confirmed keep.

Geographic Revenue (10-Q)

China declining gradually (export controls). Korea/Taiwan growing strongly (HBM + leading edge). Geographic rebalancing is healthy — reducing China dependency while growing in allied regions.

Insider Activity

CEO Wallace sold $13.0M (Nov 2025). CFO Higgins sold $2.8M (Dec 2025). $15.8M combined. Likely 10b5-1 plans — routine for semi executives at these price levels. Notable size but not anomalous relative to compensation.

Options Positioning

P/C ratio 1.68. 8 unusual puts vs 1 unusual call. ATM IV 58.8% (63rd percentile). Max pain $1,440 (at current price). Nearest expiry Apr 17 — before Apr 29 earnings.

This is macro/tariff hedging on a high-beta semi name during a broad tech selloff, not earnings-specific bearish positioning. Institutional holders buy puts on their highest-beta names when QQQ drops 7.7% in a month.

Comparables in Basket

Other semi equipment in QQQ selectable set: LRCX (1.10%), AMAT (1.29%), ASML (1.21%). All riding the same WFE cycle + AI/HBM thesis. KLAC has the strongest trailing alpha and most differentiated sub-sector position (process control vs deposition/litho). No reason to single out any semi equipment name for removal unless the WFE cycle peaks — and the data from every peer says it hasn't.