EOT Trade Alert – March 10, 2010

| March 10, 2010

March 10, 2010

Trade Alert:

   Buy WFR July 17 2010 $13 Calls at $1.70 or better

Company Background:

MEMC Electronic Materials (WFR) is a global leader in supplying wafers to the semiconductor industry.  Wafers are literally the foundation upon which virtually all of the world’s integrated circuits are built.  MEMC has been a pioneer in the design and development of wafer technologies since 1959 and operates facilities in the U.S., Europe, and Asia.

Short-Term Catalyst:

WFR acquired the privately held solar power project development company, SunEdison, in October 2009.

Since then, solar companies have fallen out of favor with investors.  And WFR’s stock hasn’t taken off with the rest of the semiconductor industry.

I think the stock’s being unfairly punished.

In 2010, WFR’s semiconductor materials division is driving a return to profitability. That’s because wafer demand is strong and picking up steam.

According to a report from one semiconductor industry association, capacity, utilization, and wafer start rates are on the rise.  That means companies like Intel (INTC), Advanced Micro Devices (AMD), and everybody else needs more silicon wafers.

You see, the wafer industry suffered through a dramatic drop in demand in 2008. Demand fell and inventories built up quickly.

Now semiconductor makers are burning through excess inventory.  The increased demand for wafers should lead to pricing power and expanding margins.  That’s a big change for the industry.  And it should drive WFR’s stock price higher over the next few months.

On a technical level, WFR is looking good.  It’s put in a floor around $11.50.  And it just crossed the 50-day moving average to the upside.  That’s a sign bullish momentum is on the rise.

These are in-the-money options that look undervalued to me.

Trade Details:

Underlying Stock Symbol: WFR
Current Bid-Ask Price: $1.54 – $1.57
Option “Buy Up To” Price: $1.70
Break-Even On Stock At Expiration: $14.70
Maximum Risk Per Contract: $170

Exit Strategy:

WFR is trading at $13.38 per share.  Resistance levels will be at $15 and again at $17. Remember, we want this stock to move higher.  Support levels will be at $11.50 and $11.  Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.



Category: EOT Trade Alert

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