My stock pick for February is Kulicke & Soffa Industries (symbol KLIC). K&S designs and produces capital equipment used to make semiconductor devices. It specializes in ball bonders, devices used to connect very thin wires. It also makes a large variety of other tools used to assemble semiconductor devices. The health of this company is directly tied to that of the semiconductor industry as well as the large users of semiconductors. Given the great upsurge in investment in equipment with semiconductors, K&S seems a natural place to invest.
Looking at the stock from a valuation standpoint, K&S is a standout. Right now, the estimated earnings for the fiscal year that ends in September of 2011 is 91 cent with the following year estimated at $1.26. These estimates have been rising recently as the fortunes of the semiconductor industry have brightened. At the close today, K&S was trading at $9.47 for a P/E of about 10 on this year’s earnings. For a stock with a projected growth rate in earnings of 38%, this is quite low. The market is exacting a penalty on K&S for all of the ups and downs of the past; K&S’s earnings have been volatile to say the least. Right now, however, the future looks bright as much of the world’s industry rushes to make up for the last few years of low purchases of equipment; this modernization wave looks to push demand for K&S products for quite some time into the future.
The company is coming out with first quarter earnings on February 1, so there will be a confirmation of how well it is doing in just a few days. If these earnings are in line with expectations, it should reinforce those in the market who believe in the future of this company and depress the skeptics. With a few more quarters of good earnings, there is no reason why the multiple cannot expand to 15, a move that would bring the stock price up to $13.65 or higher.
K&S is a high risk stock in my opinion, so it makes sense to use options to reduce the risk associated with it. Right now, one could write the april 10 call for 60 cents. That reduces your breakeven point on the stock to $8.87 (assuming a stock purchase at $9.47) and it caps your profit potential at a gain at the annualized rate of just over 50% if the stock is above 10 on April expiration.
My suggestion would be to buy the stock and write these calls for half of your position.
Disclosure: I am long the stock and have written both calls and puts in connection with that position.
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