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Option Bulls Keep Coming Back for More on this Semiconductor Stock

Posted: 15 May 2020 04:30 AM PDT

As you consider the longer-term prospects of any company right now, it can be pretty difficult. At this point, it may be more about finding a catalyst like high short interest, extreme technical positioning, upgrades and downgrades, or high-volume accumulation. Another consideration is unusual option activity.

Unusual option activity is to some degree self-fulfilling. If there is significant interest in the options of a company and the interest is more one-sided, it can cause the price to move in the direction of the interest. For example, if there was a surge in call option buying, the market maker would need to go long shares of the company to hedge the risk they've assumed by selling the calls.

The call option activity for Micron Technology Inc (MU) surged on Thursday but has been part of a trend recently. Thursday's call activity was over 60% higher than average with 37% getting filled at the ask and 34% between the market. Specifically, the 19 JUN 20 $46 call had over 20,000 in volume on Thursday against an open interest of 9,940. The activity was mostly call option buying and has been part of a series of high volume, bullish option trades that have happened on May 11, April 30 and April 23.

Action to Take: The near-term projection for MU is $50, which is at the recent highs from April 9 and April 29.

Speculators may want to consider the 19 JUN 20 46/47 long call vertical for around $0.45. The max gain of $55 per contract is achieved if the price closes above $47 by expiration. Consider closing early for $0.80 or more.

No Fastener is Strong Enough to Keep Insiders from Selling this Company

Posted: 15 May 2020 04:30 AM PDT

Fastenal Company (FAST) is engaged in wholesale distribution of industrial and construction supplies. Their operation includes fastener distribution, and non-fastener maintenance and supply. In a climate like we have today, it makes you wonder how the share price recently hit a 52-week high. The company quickly bottomed in March, announced earnings on April 14, and then it was off to the races.

It's possible that insiders in the company are standing in disbelief as well. Since May 1, FAST has had one of the highest number of sell transactions of companies with at least a $10 billion market cap. Over nearly two weeks there have been 7 sell transactions totaling 118,056 shares at a value of nearly $4.6 million.

The sellers include the CEO and President, executive vice president, director, senior executive VP, and chief accounting officer. Daniel Florness, CEO and President, sold 12,500 of his more than 240,000 shares for 38.62. Leland Hein, Senior Executive VP, sold the highest percentage of shares when he sold 20,000 of his 35,222 holdings on May 8 for $38.62.

Action to Take: FAST is a short opportunity upon a close below $38 on above average volume.

Speculators anticipating a large move up or down, may want to consider a back ratio call spread. The 19 JUN 20 37.5/40 call back ratio spread can be sold for around a $0.30 credit. In this trade, one contract of the $37.50 strike is sold and two of the $40 strike is bought. The maximum risk is the spread between the strikes minus the credit, for a total risk of $220 per contract. The trade has potential to make $30 if the stock trades at or below $37.50 at expiration. If trade breaks even at $42.20 at expiration with unlimited profit potential. However, the trade makes money upon a quick move higher before expiration.

3 High Yielding Small to Mid-Cap Stocks to Own

Posted: 15 May 2020 04:30 AM PDT

This can be a difficult climate to be in as a fundamental investor. This is because earnings are such a difficult thing to forecast right now. One of the biggest issues is the fact that many companies are withdrawing guidance. Sarah Keohane Williamson, CEO of FCLT Global commented on this issue:

"It's a step in the right direction that such a large number of companies have opted to suspend guidance, regardless of the circumstances that caused them to arrive at that decision."

While it may be a step in the right direction where the outlook isn't clear, it makes it harder for investors to evaluate. As a function, it requires the way you potentially evaluate a company. For example, balance sheet considerations may be more important that income statement considerations.

When looking at whether a company is a going concern, the amount of debt a company carries is important and the ability to service the debt. The use of debt-equity ratio and the current ratio can help with this. Another consideration is the amount of cash relative to debt.

When you scan the market for these types of criteria that includes a relatively attractive dividend yield, it becomes clear really fast that many large cap companies are not in a great position to meet the criteria. As you start to look at small to mid-cap companies the number of companies expands.

The following list of companies pay a dividend yield of 3% or higher, have low debt and relatively high cash-to-debt levels.

High Yield Stock #1: PetMed Express, Inc (PETS)

PetMed Express is a $659 million company that markets prescription and non-prescription pet medications, and other health products for dogs and cats, direct to the consumer. In an environment where going to the store is more complicated, you could say this stock falls into a category of social distancing companies.

PETS pays a 3.3% dividend yield and has grown its dividend at a rate of 10.8% a year for the previous five years. The company has no debt and maintains a current ratio of 5.3.

The current valuation for PETS is a little on the higher side, but the dividend yield is still compelling. A consideration for improving your price and a higher dividend is through selling puts. The 17 JUL 20 $25 put can be sold for around $0.95. If the stock stays above $25 by expiration you keep the $0.95 or 4% ROR. If the stock falls, you buy the stock at $25 for a net cost basis of $24.05 and a 4.6% yield.

High Yield Stock #2: Silicon Motion Technology Corp. (SIMO)

Silicon Motion is a $155.6 million company that provides negative-AND (NAND) flash controllers for Solid State Drives (SSDs) and other solid state storage devices. The semiconductor space is more cyclical, but the use of flash technology is likely to continue as the age of the Internet of Things (IoT) only continues to grow.

SIMO pays a 3.14% dividend yield and has grown its dividend at a rate of 19.2% a year for the previous five years. The company has no debt and has a current ratio of 4.53.

Similar to PETS, SIMO would be more attractive at a lower price and higher yield as a dividend investor. The 17 JUL 20 $35 put can be sold for around $1.10. If the stock stays above $35 by expiration you keep the $1.10 or 3.2% ROR. If the stock falls, you buy the stock at $35 for a net cost basis of $33.90 and a 4.1% yield.

High Yield Stock #3: Medifast Inc (MED)

Medifast is a $1.03 billion company that produces, distributes, and sells weight loss, weight management, and healthy living products, and other consumable health and nutritional products. This is another company that can operate in the current climate and could be considered a social distancing company.

MED pays a 4.29% dividend yield and has grown its dividend at a rate of 46.7% a year for the previous three years. The company has a debt/equity ratio of 0.12, a cash/debt ratio of 8.22 and a current ratio of 1.97.

From a valuation standpoint, MED is trading near historic lows and has an attractive price-to-yield relationship. If you're looking to buy MED at a lower price the 17 JUL 20 $75 put can be sold for around $3.90. If the stock stays above $75 by expiration you keep the $3.90 or % ROR. If the stock falls, you buy the stock at $75 for a net cost basis of $71.10 and a 6.3% yield.
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