Jill: A big theme to be aware of in 2013 is an increase in capex spend and the sectors that will benefit from it. CAPEX are used by a company to acquire or upgrade physical assets such as equipment, property or industrial buildings. Naturally, the industrial space is the place to be, in names like: MMM (MMM), GE (GE), Honeywell (HON), Joy Global (JOY) and so on. Skip recently wrote on the topic (XLI: Calendar Spread) and I have also successfully traded a position in the Industrial Select SPDR (XLI) from my webinars with Jon DRJ Najarian of optionMONSTER and Greg Jensen of optionANIMAL.
The tech space will benefit from this theme as well, particularly companies that engage in designing, manufacturing, marketing and servicing of semiconductor processing equipment. I believe the semis will see some pressure early in 2013 because the street (market place, not TheStreet) expects cautious CAPEX guidance from the equipment makers. That said, should these names surprise (or not miss or guide that bad), the market will view that as favorable. In addition, revenue outlook may improve largely due to the timing of investments by Taiwan Semiconductor (TSM) and Intel (INTC).
One name that could outperform in the semi space is Lam Research (LRCX), and Cramer and Stephanie agree too, having just raised the rating to a "one" in the Action Alerts Plus portfolio. LRCX sports $9 per share in cash, but the stock trades at a discount to the group. (Not to mention LRCX is trading above its 50-, 100- and 200-DMAs!) Combined with Novellus now, it has laid out plans to boost its market share in key markets over the coming three to five years, and expects to soon be realizing $100 million annually in cost savings from its merger. That is what I like to see; a pristine balance sheet with a focus on growth and creating true shareholder value.
Even though I expect some near-term bumps along the way, we as options traders, have the ability to design strategies around a specific time frame and define very specific risk/reward parameters. For this particular idea, we are going to look at a bullishly-biased calendar spread, which is a strategy involving buying longer-term options and selling equal number of shorter term options of the same underlying stock or index with the same strike price. Calendar spreads can be done with calls or with puts, which are virtually equivalent if using same strikes and expirations. They can use ATM strikes which make the trade neutral. If using OTM or strikes, the trade becomes directionally biased. For LRCX we are going to short the deep and long the cheap. Now let's turn it over to Skip as he walks us through more technicals and the trade.
Skip: LRCX is a well-managed company in the tech sector. That proof is found in its balance sheet and income statement. The income statement has been somewhat of a mixed bag for several quarters now due to the lack of the semiconductor sector to regain its earnings momentum. However, LRCX should soon begin to turn that corner as earnings begins to improve. For the quarter just ended analysts think that LRCX will report an increase of 32% ($0.45 per share versus $0.34 per share).
LRCX has cash on hand, net of debt, of $9 per share ($1.5 billion). In today's market environment unless the management is paying out a big dividend return they do not get the credit or the headlines for prudent management. Building the balance sheet up during difficult times for LRCX's industry rates very high in my book, however, because when the cycle turns, whatever the stock sector, the stocks with the strong balance sheets almost always outperform their competitors as well as the stock market.
Technically, I think LRCX has more work to do as it tries to build price support. This is the point in time and price when that $9 per share free cash position should help the stock price, much like how a high-dividend yield is a proverbial parachute for other stocks (provided that dividend yield can be met!).
Given the time factor concern the trade set up I prefer now is the bullish put calendar diagonal spread. This is a 100% controlled risk trade held over a period of months if not quarters. Please consider that the capital invested can be positioned for an elongated timeframe. However, this is one of the better options tactics to employ for LRCX now.
Trades: Sell to open 3 LRCX March 38 puts at $2.10 and buy to open 3 LRCX June 35 puts for $1.90.
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