“Armchair Trader Series”  Recommendations
- Week Beginning -
Monday, January 08, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

Option Trade - Applied Materials, Inc. (NASDAQ:AMAT) Calls

Tuesday, January 09, 2018

** OPTION TRADE: Buy the AMAT MARCH 16 2018 57.500 CALL at approximately $2.40. Place a pre-determined sell at $4.80.

Also include a protective stop loss of $0.95.

The chip-gear maker Applied Materials, Inc. (NASDAQ:AMAT), headquartered in Santa Clara, manufacturing equipment, services, and software to the semiconductor, display, and related industries worldwide, is estimated to report earnings on Wednesday, February 21, 2018. This date might be revised in the future. Based on 9 analysts' forecasts, the consensus EPS forecast for the quarter is $0.97. The reported EPS for the same quarter last year was $0.67.

The consensus view of analysts covering AMAT is skewed towards the positive sentiment.

Needham analyst Edwin Mok upgraded shares of Applied Materials from Buy to Strong Buy and increased the price target from $66 to $72. The analyst also named Applied Materials as his favorite large-cap semi-cap for calendar 2018.

Applied Materials' broad-based exposure is likely to support solid growth in the coming year, Mok said in a Monday note.

The company's WFE mix is more balanced in 2018, with the logic and memory split of its semi business at 52 percent and 48 percent, respectively, the analyst said.

"Based on AMAT's stronger positions in foundry/logic and increased logic content in DRAM, we believe AMAT's semi business stands to outperform the industry."

The display business could deliver upside above already-robust guidance, Mok said. Market expansion is the biggest growth driver in Needham's view, with multiple new display lines being built.

With 13 large LCD and more than 20 OLED projects in various stages of development, Mok said he expects a sizable ramp of the display equipment market, supporting the upside to the company's guidance.

Needham now sees increased visibility into the company's calendar 2020 target of $19.6 billion and NG earnings per share of $5.08. The 29.3-percent incremental operating margin suggested by the 2020 is "conservative," Mok said.

The possibility of the company achieving $5-plus in earnings per share ahead of the plan, thanks in part to the new tax law allowing the acceleration of share repurchasing, could support a higher share price, the analyst said.

Applied Materials, Inc. has a 12 month low of $31.86 and a 12 month high of $60.89. The company has a quick ratio of 2.43, a current ratio of 3.14 and a debt-to-equity ratio of 0.57. The company has a market capitalization of $57,680.00, a PE ratio of 17.22, a price-to-earnings-growth ratio of 1.06 and a beta of 1.81.

Influencing Factors

The company reported strong results for its fiscal fourth quarter 2017, beating estimates on both the top and the bottom lines.

Its pro forma earnings per share of 93 cents beat the Consensus Estimate mark by 2 cents and were toward the higher end of the guided range of 86-94 cents. Earnings were up 40.9% year over year.

Revenues of $3.97 billion also beat the Consensus Estimate of $40 million and were at the high end of the guided range of $3.85-$4 billion. Revenues were up 20.4% year over year.

"Fiscal 2017 was a record-breaking year for the company. We have great momentum and we're confident that in 2018 we can deliver strong double-digit growth across our semiconductor, display and service businesses," said the CEO.

The company has an excellent record of beating estimates. They have missed only once in the past five years.

After strong results, analysts have been raising their estimates for the company. The Consensus Estimates for the company for the current and next year have surged to $4.04 per share and $4.37 per share from $3.68 and $3.89 respectively, before the results.

The company continues to gain market share in the semiconductor market. Additionally, in the past few years, the company has successfully diversified its business which is no longer PC demand driven.

Additional demand drivers have emerged in the areas of big data, Internet of Things (IoT), cloud infrastructure, artificial intelligence, virtual reality and self-driving cars.

"This is the most exciting time in the history of the electronics industry. AI will transform entire industries over the coming years, creating trillions of dollars of economic value, and Applied is uniquely positioned to deliver the innovative materials needed to enable next-generation memory and high-performance computing," according to the CEO.

Analysts and Hedge Funds Opinions

Zacks Investment Research upgraded shares of Applied Materials from a “hold” rating to a “buy” rating and set a $64.00 target price for the company in a research note on Tuesday, November 28th.

According to Zacks, “Applied Materials is currently riding on inflection-focused innovation strategy which is its primary growth driver. The company continues to witness technological advancements in semiconductor and display areas. Applied Materials is in a great position to grow sustainably and profitably based on its strong pipeline of enabling technologies, supported by expanding opportunities on the semiconductor and display fronts. 3D NAND, DRAM and patterning have led to significant market share gains.”

Also, several other equities analysts have recently commented on the company…..

  • Royal Bank of Canada reissued a “buy” rating on shares of Applied Materials in a research report on Friday, October 27th.

  • Bank of America upped their price target on shares of Applied Materials from $65.00 to $76.00 and gave the company a “buy” rating in a report on Wednesday, November 15th.
  • Finally, Wells Fargo & Co began coverage on shares of Applied Materials in a research note on Tuesday, December 5th. They set an “outperform” rating and a $65.00 target price for the company

One analyst has rated the stock with a hold rating, twenty-five have assigned a buy rating and one has issued a strong buy rating to the company’s stock. The stock presently has a consensus rating of “Buy” and a consensus target price of $65.95.

Institutional investors that have recently made a change to their positions in the stock….

  • Schwab Charles Investment Management Inc. lifted its position in shares of Applied Materials by 8.8% during the second quarter. Schwab Charles Investment Management Inc. now owns 4,108,012 shares of the manufacturing equipment provider’s stock worth $169,702,000 after purchasing an additional 333,151 shares in the last quarter.
  • Atlantic Trust Group LLC increased its holdings in shares of Applied Materials by 1,892.7% in the third quarter. Atlantic Trust Group LLC now owns 862,580 shares of the manufacturing equipment provider’s stock valued at $44,932,000 after buying an additional 819,292 shares in the last quarter.
  • Finally, First Trust Advisors LP lifted its position in shares of Applied Materials by 2.9% during the second quarter. First Trust Advisors LP now owns 2,507,537 shares of the manufacturing equipment provider’s stock worth $103,586,000 after purchasing an additional 70,779 shares in the last quarter.

Harvey’s Options Volatility Indicator

Summary

Shares of this company are up about 67% in the past one year but despite this surge, they are still trading at an attractive valuation of 13.45 times forward earnings. The stock looks pretty good in terms of Industry/Sector Rank too.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the AMAT MARCH 16 2018 57.500 CALL at approximately $2.40. Place a pre-determined sell at $4.80.

Also include a protective stop loss of $0.95.

Option Trade - Lennar Corporation (NYSE:LEN) Calls

Monday, January 08, 2018

** OPTION TRADE: Buy the LEN MAY 18 2018 70.000 CALL at approximately $3.00. Place a pre-determined sell at $6.00.

Also include a protective stop loss of $1.20.

U.S. homebuilder, Lennar Corporation (NYSE:LEN), is scheduled to report its Q4 numbers on Wednesday, January 10. The company will release its quarterly numbers before the market opens. The consensus earnings estimate is $1.50 per share on revenue of $3.62 billion and the Earnings Whisper number is $1.54 per share. During the same period last year the company earned $1.34 per share. Consensus estimates are for year-over-year earnings growth of 11.94% with revenue increasing by 7.21%.

Despite a few interest rate increases over the last year, the housing market remains very strong. Low inventories across the nation have kept home prices rising, and all the major homebuilders have enjoyed strong gains over the last year. Lennar has posted a string of better than expected quarterly reports, and the market expects that trend to continue when it releases its fourth-quarter results.

Lennar has been exhibiting solid top-line performances and the trend is expected to continue in the soon-to-be-reported quarter as well, thanks to the strong demand for homes, favorable job market and impressive economic conditions.

The Miami-based homebuilder offers a diversified line of homes for first-time, move-up and active adult homebuyers. Additionally, it regularly upgrades homes to cater to the changing consumer requirements.

Lennar Co. has a 52 week low of $43.13 and a 52 week high of $67.63. The company has a market cap of $15,720.00, a price-to-earnings ratio of 19.48, a P/E/G ratio of 1.34 and a beta of 1.35. The company has a debt-to-equity ratio of 0.72, a quick ratio of 0.59 and a current ratio of 7.76.

Influencing Factors

The company's total revenues increased 15% year over year in the last reported quarter. In the first nine months of fiscal 2017, total revenues advanced 17% year over year on the back of a solid 28.3% rise in homebuilding revenues. The trend is likely to continue in the to-be-reported quarter as well.

The company's Homebuilding segment revenues (comprising almost 88.5% of total revenues) of $3.2 billion are likely to increase 11.4% sequentially and 6.9% year over year. This is expected to be driven by higher average selling prices and the delivery of a significant portion of the backlog.

The company's order trend also remained solid, growing 10.7% in the first three quarters of fiscal 2017. The consensus estimate for new home orders of 6,533 homes reflects 0.8% year-over-year growth.

The company expects deliveries to be in the range of 8,200-8,300 for the final quarter of fiscal 2017 compared with 8,228 in the year-ago quarter and 7,598 in the preceding one.

The Financial Services segment is also performing well in tandem with its homebuilding operations and is innovating new products like its recently announced creative student loan program. It is expected to grow 4.1% on a year-over-year basis.

In the Rialto Investments segment, the investment and asset management platform continues to grow its asset base. In the Rialto Mortgage Finance or RMF side of the business, market conditions have continued to be favorable, which has helped it in maintaining its position as one of the largest and most profitable non-bank CMBS (commercial mortgage-backed securities) originators. The Consensus Estimate for segment revenues are pegged at $81 million compared with $58 million in the prior quarter and $81.5 million in the year-ago quarter.

Lastly, Lennar Multifamily platform also continues to grow and the segment is expected to register $103 million in revenues. This represents 11.7% year-over-year growth, while remaining unchanged sequentially.

Analysts and Hedge Funds Opinions

Lennar had its price objective boosted by analysts at Wedbush from $54.00 to $60.00 in a research note issued on Friday, December 29th. The firm currently has a “neutral” rating on the construction company’s stock.

Also, several other equities analysts have recently commented on the company…..

  • Mizuho reiterated a “hold” rating and set a $53.00 price target on shares of Lennar in a research report on Friday, October 27th.
  • UBS Group began coverage on shares of Lennar in a research report on Wednesday, October 25th. They set a “buy” rating for the company.
  • BTIG Research lifted their price target on shares of Lennar from $62.00 to $63.00 and gave the stock a “buy” rating in a research report on Wednesday, October 4th.
  • Finally, Bank of America lifted their price target on shares of Lennar from $63.00 to $65.00 and gave the stock a “buy” rating in a research report on Wednesday, October 4th.

Of the 17 analysts who cover the stock, 10 rate it a “strong buy”, one rates it a “buy”, and six rate it a “hold”.

Institutional investors that have recently made a change to their positions in the stock….

  • Sterling Capital Management LLC owned about 0.44% of Lennar worth $55,244,000 as of its most recent filing with the SEC.
  • RWC Asset Management LLP lifted its stake in Lennar by 20.6% in the third quarter. RWC Asset Management LLP now owns 358,295 shares of the construction company’s stock valued at $18,918,000 after buying an additional 61,163 shares in the last quarter.
  • California Public Employees Retirement System lifted its stake in Lennar by 2.5% in the third quarter. California Public Employees Retirement System now owns 420,210 shares of the construction company’s stock valued at $22,187,000 after buying an additional 10,410 shares in the last quarter.
  • Finally, Virtu Financial LLC bought a new position in Lennar in the third quarter valued at approximately $825,000.

Harvey’s Options Volatility Indicator

Summary

Technical indicators for LEN are bullish with a strong upward trend.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the LEN MAY 18 2018 70.000 CALL at approximately $3.00. Place a pre-determined sell at $6.00.

Also include a protective stop loss of $1.20.