RF Micro Devices – the road kill has become the road killer

By Julian Close,

Shutterstock photo

Julian Close 06/09/2014

RF Micro Devices supplies components for wireless communications to the majority of the OEM manufacturers in the handset industry. They aim to become the largest name in supplying consistently a high-performing technology at an unbeatably low price. However, it's a crowded market, and RF Micro Devices found itself competing with a great many larger semi-conductor companies, particularly Broadcom.

During the smartphone boom, RF Micro Devices became one of the most important suppliers to Apple ( AAPL ), but price competition kept the smaller company from making big profits. In December of 2008, RFMD stock was so out of favor that it traded for less than $1 per share. By December of 2013, the stock had clawed its way back above $5 per share, but investors, noting the company's stagnant and uneven revenue, as well its tendency to drift back and forth across the profitability line, had little cause for optimism.

Then, in late February of this year, things began to change, and not because of external factors, but due to bold action on the part of RF Micro Devices. The company acquired one of its principal rivals, Triquint and analysts loved the deal, citing huge synergies and the promise of far higher future profit margins. RFMD stock rose by 20% overnight, and has been rising ever since.

In March, RFMD surprised the Street by reporting earnings of $0.12 per share, well above the $0.09 expected, and the good news continued to pour in. Billionaire hedge fund manager George Soros took a 6,667,106 share position in the company. Known for his deep knowledge of the business world, Soros usually doesn't go into volatile speculative issues unless he either has a very good idea what will happen next, or he is planning on making something happen himself.

Based on the company's great position as a supplier of Apple, its new pricing flexibility, its rising profitability and a huge number of new opportunities emerging due to the rising demand for Internet-connected home appliances, the chance of any significant near-term drop in the price of RFMD stock appears remote.

Chart courtesy of stockcharts.com

I seek to capitalize on this strength with a bull-put credit spread. Look at the August 6/8 bull-put credit spread for at least a $0.20 credit. You will need to use limit orders to place this trade, and there is a chance that it might not fill-but better to wait for another opportunity than to make this spread trade without a comfortable downside cushion. This trade has a target return of 11.1% over 68 days, which is an annualized return of 59.6%, (for comparison purposes only). RFMD stock has to fall 16.7% to cause a problem. Be aware that this is an aggressive trade, best undertaken by investors with diverse portfolios and high tolerance for risk.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Originally published on InvestorsObserver.com

This article appears in: Investing Options
Referenced Stocks: AAPL , RFMD

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