Too Late for Applied Materials?

[Phaedrus]

I was watching AMAT (quote) and blinked, and the damn stock went up nearly 10% off of its recent lows. AMAT has a veritable lock on its market, tons of cash, and zero debt ... just did a $2.5 billion stock buyback ... just basically seems to be a rock-solid stock, but it looks like I missed the last dip for a while. StockScout and other tools seem to think that the mid- and long-term prospects are excellent; I'd be interested in any insights you guys have on it as a potential buy despite the missed drop in price.


Phaedrus

 

[Gorella]

Phaedrus,

AMAT as you probably know is a solid company. The question I have for you is, are you interested in a quick trade or a long term hold? Quick trade would be tough on this one as earnings have already been announced and there are probably no catalysts out there to move this sharply higher. If anything it will float higher with this recent market rally. On the other hand, if this is something more of a long term hold for you I have an idea that you might be open to.

Buy the stock here and then sell a Jan 2008 "20" Call Option. You will immdiately receive the premium, and participate on the upside to 20. Here are the potential returns and scenarios for you assuming you bought 1000 shares of AMAT today based on the closing price of 18.76 (commissions excluded)

BUY 1000 shares costs $18,760

SELL 10 JAN 2008 20 CALLS Receive $1,550 (based on $1.55 per contract close price)

You have effectively lowered your totoal cost to $17.21

Now if by the third Friday in Jan 2008 (that is when the option expires) AMAT can be in 3 sitautions:

1. Above $20

You will receive $20,000 for your shares and they wil be taken away from you. You still keep the $1,550. Your total cash profit would be $2,790.
Your return is 2790/17210 or 16% for the 10.75 month period. Annualized that is about 18% for 12 months.


2. Below 20

You keep your shares, and the $1,550 and you can sell calls again for a future period.

3. Between $17.21 and 19.99

You can keep or sell your shares at a profit and you keep the $1,550. If you sell below the 18.76 price you bought your original shares you will have a capital loss on the shares and a capital gain on the option premium you keep. Overall though, your new "cost" is 17.21 and money is money in the end.

I hope this helps, if i have made typos or ommissions anyone else is free to jump in and correct me.

 

[Phaedrus]

Thanks for the feedback Gorella. I think you encapsulated the whole situation in your opening queston, are you interested in a quick trade or a long term hold? I was looking at AMAT from the standpoint of a short-term swing, and I think that I definitely fell asleep at the wheel on that one and missed the short-term opportunity. But as far as its long-term prospects go AMAT may well be a winner -- just wasn't my strategy for this stock at this time.


Phaedrus