By Scott Brown, President, Sabrient
She's got eyes of the bluest skies
As if they thought of rain
I hate to look into those eyes
And see an ounce of pain
Her hair reminds me of a warm safe place
Where as a child I'd hide
And pray for the thunder
And the rain to quietly pass me by
Woah, oh, sweet child o' mine – Gun's N Roses
Last week we had a bit of a "survival" episode where we decided which buy/writes to love tomorrow and which to say goodbye to. With that now behind us, we need to get exposure to a new long position to replace GameStop (GME). Fairchild Semiconductor International (FCS) has everything we want in our long positions. Let's take a look under the hood of this "Sweet Child O' Mine."
Fairchild Semiconductor International Inc. is focused on developing, manufacturing, and selling power analog, power discrete, and certain non-power semiconductor solutions to a range of end markets. Sabrient has a STRONGBUY on FCS largely due to its growth score of 93. The value score of 59 is a bit lower than I usually like to find, but that is due to the consistent performance of the company which has driven the stock price higher.
I also like the fundamental score of 74 compared to the average S&P 500 company being 49. The fundamental score is a broad measure of the company's financial health, including its balance sheet, cash flow, revenue, and earnings quality. In other words, FCS is ranked high on a measure of how real and sustainable the earnings and cash flow are.
The last confirmation I like to check, prior to suggesting a position, is the corporate governance score. FCS has a very high score of 87 in this area, putting them in the top tier for conservative accounting measures. Sam Antar has been discussing conservative accounting measures on FOX News and on his website — specifically the accounting irregularities of Overstock.com (OSTK), Green Mountain Coffee Roasters (GMCR), and this week, the U.S. Government.
Her (FCS) earnings growth and consistent performance above analysts' targets "remind me of a warm safe place," targeting $1.64 for 2011 and $1.82 for 2012. The five year expected growth rate of 12% gives FCS the "eyes of the bluest sky." We have seen positive earnings surprises in each of the last four quarters: June 2010 $.40 vs. $.31 expected, Sept. 2010 $.42 vs. $.39, Dec. 2010 $.45 vs. $.39 and March 2011 $.39 vs. $.36. The forward P/E is 10.43 in a sector that trades closer to 18. Eleven analysts have raised their expectations for 2011 earnings in the last 30 days, which we prefer, because it is a good sign of insider buying. Insiders and analysts who follow the company should know more about the prospects of the company than most others. Note: CITI raised the price target on FCS from $22 to $26.
Despite this week's warning from the S&P concerning the long term outlook for U.S. debt, we will "pray for the thunder, and the rain to quietly pass (us) by" and give exposure to FCS using a bull/call Spread. A bull/call Spread is accomplished by purchasing a call, in this case the Nov. $14 call (FCS111119C00014000), and selling a higher call, in this case the Nov. $19 call (FCS111119C00014000) for a net $3.50 purchase. We add a Nov. $17 put (FCS111119P00017000) for $2.00 which makes the cost of our $5 spread $1.50. Worst case: we end up owning the FCS stock in November for $19.00 ($17 put price plus $3.50 bull/call spread cost minus $1.50 put premium). Best case: we invest $2 in the position, and if FCS is at or above $19 in November, we make 150% or $5.
Bull/Call Spread on FCS
BUY (1 contract for each 100 shares) FCS Nov $14 call at the market, Thursday April 21, 2011.
SELL (1 contract for each 100 shares owned) FCS Nov $19 put at the market, Thursday April 21, 2011 (approximately $3.50 net cost of bull/call spread).
SELL (1 contract for each 100 shares) FCS Nov $17 put at the market, Thursday April 21, 2011.
Disclaimer: This is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.