Abnormal Options Activity an Indicator to Buy?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A great indicator I like to use in researching a company is unusual options activity, as that is one of the best tools for leverage. Therefore, we can reasonably assume that if there is very strong and abnormal options activity in a given stock, some well-informed or knowledgeable people see a catalyst soon coming or some great value. Here are two companies that caught my eye on Jan. 10.
Micron Technology (NASDAQ: MU) is a major company in data storage and memory products generating over $8.6B in revenue this past year. Investors seemed bullish on the Jan 2013 15 calls aggressively purchasing at the asking price close to 11,500 contracts against only 9,108 in open interest. The company has performed well since its last earnings report on Dec. 21 moving up approximately 30%, but still sits well below its $11.95 52-week high and far below the $15 strike price of these options. I see MU as still cheap trading at .8x P/S, EV/S, and P/B, trading just over 3x EV/EBITDA, and management expecting market conditions to improve in the foreseeable future. However, I believe a $15 valuation is a stretch and at this time the company still has to prove itself to warrant such a multiple. I see $8.5 as a reasonable target, having it match book value and its sales, until we see more results in the coming quarters.
Applied Materials (NASDAQ: AMAT) is a giant in the semiconductor equipment and materials industry worldwide with over $10.5B in revenue this past year and just under $2B in net income. The company had a massive 73,118 Jul 12 calls changing hands against only 655 in open interest. However, this wasn’t decidedly bullish as they looked to be sold at the bid price indicating most likely a covered call trade. Either way, AMAT looks enticing here at just an 8x trailing and 10x forward P/E, 1x EV/S, strong net cash position in excess of $4B, and consistently growing 2.9% dividend yield. Fellow competitor KLA-Tencor is a nice holding to diversify it with as it’s trading at a 10x trailing P/E, 11x forward P/E, strong net cash position as well in excess of $1.3B, and 2.9% consistent dividend yield as well.
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