The Money Tree

Safely Generating Income in Retirement

New Trade – AMAT

Posted by mounddweller on June 1, 2012

Fellow Traders,

Yes, believe it or not I actually executed more than one trade in a single day.  Hard to believe, I know.  Anyway, you’ll recall in my post last week that I mentioned that AMAT was approaching a price point at which I was interested in owning shares.  I like AMAT at $10 or less.  Thus, with the big sell-off in the overall market today and the corresponding increase in volatility I took the opportunity to sell puts on AMAT.  Here are the specifics of my trade:

STO 10 AMAT JAN13 $10 puts at $1.16.  This gives me a 11.6% ROIC with 232 days to expiration.  Annualized that equates to 18.25%.  Given that I executed the trade with AMAT trading at $10.10 my only down-side protection is the premium I received.  However, given that I want to own AMAT long-term and think $10 is a fair price I’m not worried about down-side protection.

You’ll recall I executed a similar trade late last year.  Back in December I sold 5 JAN13 $10 puts for $1.57.  The market rebounded sharply shortly thereafter and I was able to buy them back for only $0.75.  If you take the premium I received from that trade and add it to the premium I received on my most recent trade you’ll find that if I have the stock put to me at $10 my true net cost will be $8,465 or $8.47/share.   This compares very favorably to the 5-year low of $8.35 which occurred back on November 17, 2008.

Note: observant readers may have noticed a discrepancy between the per share net cost I quoted in this post vs. the value I posted last week.  The number I posted last week was off slightly because I calculated it assuming I had traded 10 puts.  In actuality my trade back in December was only 5 puts.

So, why do I like Applied Materials?  Well, first let’s look at the fundamentals.  AMAT trades at 9.88x trailing and 8.63x forward earnings.  It has about $220M in net cash on the balance sheet and generated $1.15B in free cash flow over the past 12 months.  It also pays a quarterly dividend of $0.09/share.   AMAT has increased that dividend by 50% over the past 5 years.  At my net cost of $8.47 the dividend yield will be 4.25%.  Not bad for a high-tech, growth stock.

The 5-year chart is below.  You can see the stock has support at $10 but if it doesn’t hold my net cost compares favorably with the multi-year lows from 2008.

Well, there you have it.  I’ll be back later this weekend with another post about other opportunities I’m keeping an eye on.

Regards,

Troy

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