Yesterday I previewed Applied Materials FQ2 earnings results that were released last night highlighting the stock’s curious year to date relative underperformance to the Nasdaq Composite and the Semiconductor etf, the SMH. AMAT trades at discount to most of its peers and the broad market, but as some investors have forgotten of late is that cycle stocks like those who make equipment for the manufacturing of commodity products like microprocessors have peaks and troughs that are out of their control, per my preview:
AMAT is a cheap stock trading 12x fiscal 2018 eps which is expected to grow 38% on 20% sales growth. This growth is expected to moderate in F2019 to about 4 & 5% respectively, one reason for the low multiple.
Despite posting 29% yoy sales gains in the quarter justed ended, the stock is down 10% due to a slight guide down for the current quarter, per BarronsOnline:
the company projects revenue in a range of $4.33 billion to $4.53 billion, and EPS of $1.13 to $1.21. That compares to consensus for $4.54 billion and $1.16 per share.
Really?? down 10% on the slightest of misses… which speaks to the potential for cooling sentiment in the space.
I want to update the trade ideas I laid detailed yesterday.
First the bearish idea:
So what’s the trade? The relative underperformance to the SMH is interesting despite not a large spread between ytd gains, AMAT is down 13% from its March highs while the SMH is down half that.
If I were inclined to play for a miss and guide down I would target $50 in the coming weeks.
BEARISH TRADE IDEA: AMAT ($54.25) BUY MAY 25TH WEEKLY 54 – 50 PUT SPREAD FOR $1.15
-Buy to open 1 May 25th 54 put for 1.40-Sell to open 1 May 25th 50 put at 25 cents
With the stock at $49.40, this $4 wide put spread that expires next Friday is worth about $3.70, nearly the full $4 as it is through the short strike of the spread and should be closed as it is not a great risk-reward waiting around another week to receive the full value.
And the bullish trade idea:
Or if I were inclined to play for a beat and raise, targeting a one day move in line with the implied move I would consider…
BULLISH TRADE IDEA: AMAT ($54.25) BUY MAY 18TH (TOMORROW EXPIRATION) 54.50 – 57 – 59.50 CALL BUTTERFLY FOR 50 CENTS
-Buy to open 1 May 18th 54.50 call for 1.05
-Sell to open 2 May 18th 57 calls at 30 cents each or 60 total
-Buy to open 1 May 18th 59.50 call for 5 cents
Readers of yesterday’s note might have been able to see which way I was leaning on this one which is why I looked to risk as little as possible playing for a beat and raise. This trade expires on today’s close, has zero chance of being in the money and should NOT be closed as the pennies you would receive for closing would not make up for the commission of closing four legs.