We started watching Applied Materials (NASDAQ:AMAT) in mid-December, when optimism around the trade situation was pushing the market higher every time there was an update.
At the time, the reports that the U.S. was considering postponing the Dec. 15 implementation of new tariffs on Chinese goods and reducing the existing tariffs by as much as 50% sent traders into a buying frenzy.
AMAT provides manufacturing equipment, services and software to the semiconductor industry. Trade war worries had put some downside pressure on the semiconductor industry because of its exposure to the Chinese economy, but AMAT had been successfully bucking the trend and beating expectations for all of 2019.
Now we have seen Dec. 15 come and go, and there weren’t any tariff increases. The first phase of the trade deal should be signed soon.
We think the time is right for a bullish trade on AMAT, and we’re recommending a put write as a way to take advantage.
Signing the Deal and Upgrading the Stock
In November, AMAT beat revenue expectations by $70 million and earnings expectations by $0.04 per share — coming in at $3.75 billion and $0.80 per share, respectively. Management also provided bullish guidance for the first quarter of 2020.
AMAT’s next report is on Feb. 12, and the company has a lot going for it.
The trade deal that pushed AMAT higher last month is set to get signed on Jan. 13. If Vice Premier Liu He and his delegation’s visit goes smoothly, companies like AMAT will be better off for it.
Analyst David Wong at Nomura Instinet recently upgraded the stock, increasing his price target from $40 to $58 per share. This was a big adjustment and represents a shift in confidence by this important analyst in the semiconductor sector. We agree with the rationale behind the upgrade, and it looks like investors are taking it pretty seriously.
Hoping for a Support Bounce
AMAT pulled back with the rest of the market over the past two sessions, but it looks like it might be finding some support in the $59-$60 range. Barring that, we think AMAT’s old resistance at $58 could serve as solid support, making it a good strike price for a put write.
Daily Chart of the Applied Materials, Inc. (AMAT) — Chart Source: TradingView
Earnings season is approaching, which we mentioned above, and because AMAT and other technology stocks report slightly later than the big banks, we can still sell puts without being obligated to hold this position through earnings. We recommend looking for an expiration before AMAT’s earnings report in February.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.