- Advanced Micro Devices (AMD) once again beat earnings soundly.
- Technicals approaching overbought readings short-term.
- Sell puts to get paid now to be a buyer later and lower.
Advanced Micro Devices (NYSE:AMD) reported another solid quarter Tuesday. Earnings came in well above consensus at $1.02 versus expectations for 83 cents. Revenues also were a big beat and the company guided higher. Margins improved greatly and were much better than anticipated. All in all a solid quarter once again for AMD. This marks the ninth straight quarter of surpassing earnings expectations by AMD.
The analysts seem to like the parade of earnings beats. TipRanks shows AMD stock as a “Moderate Buy.” The average price target of $132.40 is nearly 40% higher than the current price (yet only a moderate buy?) . The lowest estimate is still a respectable $98.
Cowen analyst Matt Ramsey feels there is a lot of growth left in AMD following the earnings release. He believes the valuations don’t reflect that and has a $160 price target on AMD stock.
Valuations have certainly become more attractive over the past four quarters. Shares have barely budged in that time frame even though earnings have come in well above expectations each of the past four quarters. The combination of a stagnant stock price along with much better earnings makes for a much lower price-to-earnings (P/E) multiple.
AMD’s current P/E is now under 35 and nearing the cheapest multiple since last October. This marked a significant low in AMD stock and preceded a rally to the all-time highs. This current P/E is also well under the median of 60 over the past decade. AMD stock is looking much more attractive on a forward basis as well with a P/E under 23. This should serve to staunch any major downside over the coming months.
|AMD||Advanced Micro Devices||$95.18|
AMD stock held the crucial horizontal support area at $85. Shares got to oversold readings on a 9-day relative strength index (RSI) basis before bouncing. Moving average convergence divergence (MACD) reached a negative extreme but has since turned positive. Bollinger Percent B briefly printed below zero before improving dramatically. AMD was trading at a big discount to the widely followed 20-day moving average then raced to a premium.
Previous times all these indicators aligned in a similar fashion marked significant short-term lows in AMD stock. Look for AMD to hold the $85 level for the foreseeable future.
I talked about AMD stock pre-earnings on my weekly Morning Trade Live appearance on the TD Ameritrade Network. I had a somewhat bullish viewpoint post earnings and recommended a call calendar spread trade. This proved to be prescient with the trade up about 100%.
The problem now is that AMD has rallied 15% off the recent lows near $85 just a few days ago. Shares are nearing overbought levels as they approach major overhead resistance at the $100 level. Rather than buy AMD stock now it pays to have patience and look to be a buyer on a pullback. Especially in this highly volatile market environment.
So now it makes probabilistic sense to sell some out-of-the money puts instead of chasing AMD stock at current levels.
How to Trade AMD Stock Now
Sell AMD July $85 puts for $4.00.
The short strike is structured right at the major support area of $85. The seller of these puts receives $400 for each put sold to position to be a buyer of AMD stock at $85. The net cost if assigned would be $81 ($85 strike less $4.00 premium received).
The July expiration is well before the next earnings report due in early August. This eliminates any earnings related risk. Option traders may want to consider selling a put spread instead of puts to lower risk and margin requirement.
Selling the July $85/$80 put spread would bring in $130 per spread while risking $370 per spread. Return on risk equates to 35%.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.