I've Got a Conservative Way to Play Tech

Semtech is a pure play technology stock that traditionally trades at high multiples. The company's own description of what they do is shown below. Since slightly reducing guidance for the second half of fiscal 2022, which ends Jan. 29, 2023, and into fiscal 2023, the shares have dropped precipitously. SMTC carved out an all-time high of almost $95 last November yet was offered on Tuesday at just $29.34. That severe price drop appears to be a major overreaction. First half results were stellar compared with year earlier numbers and full year EPS are still likely to set a record. If current guidance proves correct SMTC will still have more than doubled its EPS since the end of fiscal 2016. (Fiscal third-quarter results are due out at the end of the day of Wednesday.) At the current quote new buyers are getting about twice the earnings for barely above where SMTC sold for a full six years ago. Tremendous value added like that, which is virtually un-reflected, should power the stock much higher before long. In fact, SMTC offered exit points at around double to triple its present price each year since 2018. Patient holders can expect to see excellent chances to sell at those levels once again. Previous best entry points (green-starred below) came with SMTC trading for from 11.4-times to 16.6-times earnings. The stock's should have sold moments (red-starred) only occurred when SMTC commanded from 22.6-times to 42.2-times earnings. As of Tuesday, SMTC was offered for just 10.3-times its already reduced fiscal 2022 estimate. That is the lowest valuation on these shares in over a full decade. If SMTC reverts toward a more normal price-to-earnings of 20, it could be selling north of $54 by this time next year. I am not alone in seeing value here. Morningstar says SMTC would merit its highest, 5-star buy rating, anywhere below $29. It sees present-day fair value as $53.84. That is 83.5% above its price right now and right in line with my own, somewhat conservative, year-ahead goal. Traders who like this idea but hate to buy when the next few quarters might show negative year over year results might want to consider setting up a June 16, 2023 expiration date $25 buy/write combination using SMTC. Actual price on SMTC's June 2023 $25 and $30 calls and puts, with the stock at $29.34, are shown below. Here are the cash flow details on each 100-share commitment if executed in a margin account with enough excess buying power to support the put sale, or sales. Buy/writes involve owning round lots of the underlying shares while selling covered calls and naked puts on the same stock, typically using identical strike prices and expiration dates. If held through expiration day, there are just two basic ways for this buy/write combo to play out. SMTC will either close at $25 or higher, or below $25. If above, the best-case scenario detailed next would unfold. If SMTC goes nowhere, rises or even if it drops by up to $4.34 per share from the trade inception price the cash-on-cash gain would be 24.4%. That translates into a very nice 44.7% annualized profit on a stock which could have declined by up to 14.79% from start to finish. How cool is that? What if SMTC somehow fails to hold at even $25? If so, the following worst-case scenario would kick in. Sellers of the buy/write combination would end up with double their original position sizes but at an average net cost of just $22.55 per share. That means anything less than a 23.1% drop would still leave you able to liquidate for at least a small gain. Traders looking for even larger potential gains could substitute $30 strike price options for the $25 strikes. Possible results for that buy/write are shown next. The initial cash outlay rises from $2,009 to $2,150 per each 100-shares. Maximized upsize, though, ratchets up to 72.54% annualized if SMTC merely rises to at least $30 by expiration day. Semtech shares would need to go from $29.34 to $40.94 by June 16 to provide the same percentage gain as this more aggressive buy/write. Worst-case you'd own a double-sized SMTC position at an average cost of $25.75 per share. That outcome appears far from scary. Buy some SMTC shares outright for unlimited upside and no preset time horizon. Use buy/write combinations as a great way to play SMTC over the coming seven months.

I've Got a Conservative Way to Play Tech

Here's a plan for trading Semtech Corp.

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