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Sell Cash-Secured Puts to Take Advantage of ASYS Downturn

|Includes: Amtech Systems, Inc. (ASYS)

Amtech Systems (NASDAQ:ASYS) is an Arizona-based company that provides manufacturing equipment to the solar and semiconductor industry. While the stock has struggled in 2011 – it is 43% off highs made in mid-February – it has still tripled from its bear market lows in late 2009.

From a value investor standpoint, ASYS seems almost too good to be true. The company has nearly $7/share in cash net of liabilities, while trading at a ttm P/E of 8.1 and a forward P/E of 7.3. (Enterprise figures are even better – an enterprise value of just 5.2x earnings.) All this with forecast revenue for FY11 (from the company's guidance) of $240 million – 1.3x the company's market cap and better than twice the company's enterprise value of a little more than $100 million. The company expects to double revenue in FY11 and with exposure to the growing solar industry worldwide, ASYS would seem to be positioned to soar.

While there are some concerns – the company filed a $60MM shelf offering in February and has been a target of short sellers, with a 14% short float – ASYS looks like an excellent company, and the recent sell-off provides an attractive entry point. We will save the more detailed analysis of the bull case for later; in the meantime, the floor put in by ASYS' strong cash position and detailed growth creates an excellent short-term opportunity to sell August 17.5 puts, a strike price just pennies below Friday's close at 17.56.

With 61 days to expiration, the selling of a cash-secured put at the bid of 1.60 offers a 9.1% return on our risk capital, a 54.4% annualized return.To earn our 9+%, we need the stock to avoid a +++% loss. Our break-even is 15.90, a 9.4% drop from Friday's close (and below the base of support consolidated in late 2010 at around $16-17/share).

With the possibility of a short squeeze should support finally be reached, a simple purchase obviously offers more upside and the ability to fully capture any bounce-back in the stock. However, the general downward drift in the stock, and the headwinds facing the broader market in general and semiconductor sector in particular, point to using a cash-secured put (equivalent to a covered call) to provide some downside protection. As mentioned, our potential profit is a handsome 54% annualized rate, while our downside is owning ASYS at a net of 15.90, just over half of its 52-week high. Owning ASYS at 15.90, with $7/share in cash, growing revenues, and solid earnings, is a pretty good downside to have.