EOT trade alert May 16, 2014

| May 16, 2014

May 16, 2014

Trade Alert:

Buy HIMX September 2014 $7.00 Calls at $1.10 or better

Company Background:

Himax Technologies (HIMX) is a fabless semiconductor maker in Taiwan.  They make semiconductors for flat panel displays like televisions, handheld devices, and liquid crystal on silicon micro-display.

Short-Term Catalyst:

HIMX’s stock price has been on a rollercoaster ride since we first bought call options on this stock back in January of 2013.

The stock climbed from around $3.00 then to as high as $16.15 per share in March. But since then, the stock price has dropped by 56% to around $7.00 per share today.

The staggering 438% increase in price and the subsequent 56% drop have largely been driven by the same three catalysts…

First off is the display driver business.  The growth of HIMX’s display driver business fueled growing sales and earnings growth and the initial surge in HIMX’s stock price. But the buildup of inventory at Samsung (one of their biggest customers) and the drop in amount of sales to them has derailed this source of growth… at least temporarily.

The next thing that pushed HIMX’s stock even higher was Google Glass.  In short, HIMX is Google’s partner of choice for micro-display drivers.  That means HIMX stands to profit from the mass production of wearable computers.

But as Google remains non-committal about a broad consumer release date for Google Glass, many analysts have soured on HIMX.

And last but not least, we have the hedge funds.  In 2013, they used massive amounts of money and leverage to invest in hot growth stocks like HIMX.  The abrupt exit from these positions over the last few months has coincided with HIMX’s fall.

Here’s the thing…

The semiconductor business has been and always will be a volatile industry.  And all of the things HIMX is getting killed for are temporary.

Samsung will burn through inventory and ramp up orders again.  Google Glass will have a broad consumer launch at some point.  And we’re already seeing investors using the recent selloff in growth stocks to buy the best growth stocks at a huge discount.

What’s more, HIMX is currently trading at the same price as when Google first announced their investment in the company to expand their production capabilities back in July 2013.  I think this puts a floor underneath the stock and we’ll see HIMX recover from here.

And the last thing I see is a death cross; the 50-day moving average is crossing below the 200-day moving average.  Many novice technical analysts see this technical indicator as a negative and indicative of more losses in future.  But in my experience, this crossover happens at the end of a correction.

Let’s use this opportunity to pick up call options on a beaten down growth stock with a high ceiling.  If I’m right, this option could deliver a huge gain by the time it expires in September.

Trade Details:

Underlying Stock Symbol: HIMX
Current Bid-Ask Price: $0.90 – $1.00
Option “Buy Up To” Price: $1.10
Break-Even On Stock At Expiration: $8.10
Maximum Risk Per Contract: $110


Exit Strategy:

HIMX is trading at $6.91 per share.  Resistance levels will be at $9.00 and again at $11.00.  Remember, we want this stock to move higher.  Support levels will be at $5.75 and $5.00.  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

About the Author ()

Comments are closed.