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Executive summary:

  • Insider buying on the open market at prices from $10.40 to $10.59 by President & CEO Gregory Waters indicates it's time to follow his $1.05 million purchase with a position riding his coattails.
  • A cover called strategy allows you an upside potential gain of 40% annualized rate of return while providing an effective entry price BELOW that paid by CEO Waters.
  • Downside risk is limited by $3.00/share cash and a technology moat provided by its largest selling product.

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Integrated Devices Technology, Inc. (NASDAQ:IDTI) is a mainstream supplier of its products to the rapidly growing LTE/4G market. Management is moving to focus on this high growth, high margin business segment while divesting itself of profitable lines in slowing business lines as described in Asean Century's recent PRO article which discusses the operating activities, prospects and management of this fine company.

Factors which limit the downside risk of this opportunity include:

  1. $429 million cash on hand coupled with further targeted divestitures expected to bring its cash on hand to over $460 million (over $3.00 per share)
  2. No debt
  3. Use of covered calls to lock in potential upside gains of 20% within 6 months (40% annualized) as discussed further below.
  4. An effective entry price of $10.00 per share, a price BELOW the $10.40-$10.59/share most recently paid by insider CEO during his $1 million buying spree on the open market over 2 of the past 3 trading days. (Refer to the covered call strategy discussed further below)
  5. Integrated Device's moat offered by the deep penetration of its RapidIO switch technology.

Integrated Device's RapidIO switches are found in every 4G based bankcard system and used by every major OEM in the LTE/4G build-out. This moat in the highly profitable communications market segment accounted for 61% of IDTI's total revenues in the 3rd quarter.

3 factors converged over the past week to signal a strong buy to score with this hat trick:

  • A fair value of $13 per share (as described in Asean Century's article referenced above).
  • The purchase of over $1 million worth of shares in the open market by CEO Waters for his personal account in the past 3 trading days.
  • A current trading price of $11.01 per share

For investors looking for an asymmetrical 40% annualized upside gain, limited downside risk buttressed against strong cash per share and a better effective entry price than CEO Water's $10.50/share open market buys this past few days, a covered call strategy is the solution.

Buy shares at the $11.00/share close of today (Tuesday) and sell the August covered $12 covered call for its closing $1.00 per share. This will provide a net effective entry price of $10 per share with potential $12 sale price on called away shares. This is a 20% gain within the 6 month contract window (40% annualized rate). In the event share prices fall below $10 by contract close, you will still have a 9%+ annualized yield from your $1/share call premium and can then look to further covered call strategies on your shares to generate additional returns while waiting for a better time to liquidate your shares. Thus, even the downside scenario provides a superior rate of return on your investment.

More risk oriented investors may prefer to follow on Mr. Waters coattails with a buy at the $11.00 range and hold for potentially greater gains then offered using the covered call strategy. Others may pick a different call contract Strike-Price/Date combination to adjust for their personal reward/risk appetite.

Disclaimer: I am not a licensed securities dealer or advisor. The views here are solely my own and should not be considered or used for investment advice. As always, individuals should determine the suitability for their own situation and perform their own due diligence before making any investment.

Source: Is It Time To Integrate This LTE/4G Supplier Into Your Portfolio? 1 Million Reasons To Say Yes