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KLAC: Let's Go Stock Picking!

Stocks in this article: KLAC SMH INTC AMAT ARMH

KLA-Tencor (KLAC - Get Report) is in the business of designing, manufacturing and marketing (selling!) semiconductor equipment and materials of such. It has been been in this business almost from its infancy in the 1970s.

Management should be considered excellent, as well as somewhat conservative given the fact that the company has basically zero debt (relative to cash on hand) as well as approximately $8 per share in net cash. However, the 17 analysts who follow KLAC according to Yahoo! Finance consensus estiamtes see an earnings decline ahead. They think KLAC has earnings headwinds all the way into the end of their fiscal year, which is June 2012!

Technically I will let T3 do the analysis, with the only comment I have is that KLAC is now priced as per perfection, having gained over 10 points (30%) since October 1! Thus I am thinking reversion (a bit lower stock pricing!) could soon be in play for KLAC.

Let's review the T3/OP video with and see where Scott prices KLAC in the near-term on the charts and why Jill wants to own it for the long-term based on fundamentals.

Not too many fund managers want to own any stock not growing their earnings relative to the stock's price earnings ratio! That is especially so in a market that is replete with competitor stocks in the semiconductor sector that are expected to show good to excellent growth in their earnings throughout the calendar year forthcoming.

The trade in KLAC I prefer is the somewhat bearish (negative delta) call calendar diagonal strategy where the near month is shorted as well as being of a lower strike price and the further out month has a higher level strike price. Should all go well, the shorted call expires worthless, which creates a naked long call position that can become nicely profitable should the stock rally after the call shorted expires near or at zero value.

This is a medium risk trade as the entire risk is controlled, with high reward trade if the shorted call expires near or at zero value and the stock then begins its next upward/bull cycle.

Trades: Sell to hosed 3 KLAC December 46 calls at $3.20 and buy to open 3 KLAC January 48 calls for $3.00.

The total risk for this spread is $1.80 points as KLAC has traded ex-dividend for this quarter on November 9.

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