The Money Tree

Safely Generating Income in Retirement

Archive for December 21st, 2011

New Trade – AMAT

Posted by mounddweller on December 21, 2011

Fellow Traders,

I have a new trade to tell you about.  Earlier this afternoon I executed the following:

STO 5 AMAT JAN ’13 $10 puts at $1.57.

I haven’t executed a trade like this in the entire 3 years I have been publishing my blog.  However, I have done similar trades a time or two prior to beginning my blog.

Before I begin discussing why I executed this trade let’s take a moment to get you familiar with Applied Materials (AMAT).  Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, flat panel display, solar photovoltaic (PV), and related industries worldwide.   It was founded in 1967 and is headquartered in Santa Clara, California.

As you can see from the financial data provided below AMAT operates in a highly cyclical industry.  It is either feast or famine.  Lately, it has been a feast but as we’ll see when we look at the price chart, Mr. Market believes a famine is right around the corner.

The cyclicality of the business is evident in the sales numbers.  Sales were low during the recession in 2002/2003.  They accelerated rapidly coming out of the recession in 2004 and expanded along with the economy until the financial crisis in 2008/2009.  Then it was back off to the races again in 2010.  That has continued into 2011.

You’ll also notice AMAT enjoys fat profit margins when times are good but can fall into negative territory when the economy slows down.  However, AMAT being the well managed company it is plans for the lean times by keeping debt low and cash levels high.  Debt to Equity is a very reasonable 22.00% and cash, net of debt, is $4.29B or $3.27/share.

Now, let’s take a look at the 3-year price chart.

As I mentioned earlier Mr. Market is anticipating a slow-down in the economy and thus is dumping cyclical, high tech companies like AMAT.  In addition, AMAT generates a portion of its revenue from the solar photovoltaic industry, which has been decimated in recent months.  Both of these factors have combined to knock AMAT down from a 52-wk high of $16.93 to the 52-wk low of $9.70 which was hit on October 4.

On the 3-year price chart you can see AMAT hasn’t been this low since March 9, 2009 when it closed at $8.58.  If you take a moment to look at a longer price chart you’ll notice that AMAT prior to March 2009 hadn’t been under $10 since 1998!

So, by now you’ve surely determined one of the primary reasons I like this trade.  AMAT is trading at historic lows!  The risk/reward ratio is solidly in my favor.

Here’s another reason.  Back in 2005 AMAT began paying modest quarterly dividends.  Every year since then they have increased the dividend.  It is now $0.32/year.  Hence, it is currently yielding 3.2%.  Not bad for a cyclical tech stock.  That is on par with MSFT and INTC.  If they continue their recent pattern the dividend will go up again in May 2012.

Last, but not least, another reason I like the trade is of course the size of the premium.  I sold the JAN ’13 $10 puts for $1.57.  My annualized ROIC is 14.51%.  At that rate I am able to double my money every 5 years.  Note also that my net cost if I have the stock put to me next year will be $8.43.  This is below the March 2009 market lows!  And, assuming AMAT continues paying the current dividend of $0.32 my dividend yield would then be 3.80%.

Well, there you have it.  One final point, you may have noticed I only sold 5 contracts.  My strategy here is to sell more if AMAT continues to drop.  I will keep an eye on the premiums for the JUL $8 or $9 strikes.  If, at some point in the year I can sell either of those for a 15% annualized ROIC I will do it.




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