Buy Alert: Cypress Semiconductor (CY)

By Jim Pearce • January 11, 2018

TRADE INSTRUCTIONS

Date: January 11, 2018
Name: Cypress Semiconductor Corp.
Symbol: CY (NasdaqGS)
Type: Open
Limit: Buy below $18

TRADE TARGETS

Holding Period: 5 months
Target Return: 22.2%
Annualized Return: 53.3%
Target Price: $22
Stop Loss Level: $15

COMPANY DESCRIPTION

Cypress Semiconductor Corporation manufactures embedded system solutions for automotive, industrial, home automation and appliances, consumer electronics and medical products. The Company’s segments include Microcontroller and Connectivity Division (MCD), and Memory Products Division (MPD). MCD focuses on microcontroller (MCU), analog and wireless and wired connectivity solutions. MPD focuses on parallel and serial NOR flash memories, NAND flash memories, static random access memory (SRAM), ferroelectric-random access memory (F-RAM) ferroelectric memory devices and other specialty memories. Link to company website.

TRADE RATIONALE

As I mentioned in yesterday’s Extend Alert for KLAC, I believe the recently enacted corporate tax cut will result in more spending on technology. That should increase demand for the type of connective chip technology manufactured by Cypress Semiconductors (NYSE: CY).

The connectors and related devices like microcontrollers and sensors that drives this market segment haven’t been affected by the potentially game-changing flaws recently publicized in the design of CPUs and possibly other semiconductor-related products central in technology. Unlike these products, Cypress’s offerings won’t need to be redesigned.

With a free cash flow yield of nearly 7% and a rock-bottom PEG ratio of only 0.7, Cypress is dirt cheap by any measure. Its forward P/E ratio of 14 is low given its 17% quarterly earnings growth, and its dividend yield of 2.9% will appeal to income investors. We may get a big move out CY when it releases its quarterly and annual results within the month, which may include forward guidance regarding the impact of the tax cut on demand for its products.

NOTE: This stock is optionable (I am using a 5-month target hold period to capture the June 15 monthly options)

Stock Talk

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MarkS

01/11/18 ‐ 11:48am ET January 11, 2018 at 11:48am ET

Opened put credit spread June 17/22 for $3.80nc
thanks, Jim

Dramatic License

01/11/18 ‐ 12:32pm ET January 11, 2018 at 12:32pm ET

In with June $16 calls for $1.93

Jim Pearce

02/02/18 ‐ 1:10pm ET February 2, 2018 at 1:10pm ET

Hi DL. Looks like that call is up 10% today, and your position is back in the black.

Ajax

01/11/18 ‐ 1:43pm ET January 11, 2018 at 1:43pm ET

I see the option (pun intended) is a bit open-ended here. One could buy a call or sell a put credit spread starting in or out of the money. Might there be a suggestion as to which might be best? Or perhaps another option(s) strategy?

Jim Pearce

02/02/18 ‐ 1:08pm ET February 2, 2018 at 1:08pm ET

Unfortunately for Cypress, it released good news on a bad day for the overall stock market so it’s not getting as much of a bounce as it otherwise would (https://www.investingdaily.com/aggressive-trader/articles/41060/aggressive-trader-joins-forces-with-systematic-wealth). As of 1 p.m., CY was up 1.4% while the DJIA was down 1.5%. So far, most of the chip manufacturers are coming in above estimates, so this sector may end up seeing a surge of investment in the weeks to come.

Rick

02/02/18 ‐ 2:01pm ET February 2, 2018 at 2:01pm ET

Just realized I did not post my play here.

I went with June 2018 $15 calls for $2.60 on Jan 11.

Jim Pearce

02/02/18 ‐ 2:29pm ET February 2, 2018 at 2:29pm ET

The current bid I see on that contract is $2.80. so looks like you are back in the black, too.

Jim Pearce

02/20/18 ‐ 3:35pm ET February 20, 2018 at 3:35pm ET

Not sure why CY is up 4% today when the rest of the market is tanking. The company did announce its next dividend payment today (https://finance.yahoo.com/news/cypress-announces-quarterly-cash-dividend-130000132.html?_fsig=bihkgspcwbVElKJtjHxTXA–), but it’s the same – 11 cents per share – as it has been for the past several quarters so I doubt that’s the reason (http://investors.cypress.com/dividends.cfm). I guess the NXPI news (https://finance.yahoo.com/news/qualcomm-enters-amended-definitive-agreement-113000177.html) has speculators looking for the next takeout candidate…

Rick

02/20/18 ‐ 3:49pm ET February 20, 2018 at 3:49pm ET

I think chips overall are up today. I read somewhere today that INTC was the topic of a positive analyst note (may have even been an upgrade). So add that to raised offer to NXPI and consequential movement in AVGO and you get all chips rising. NVDA is up over $4.

Jim Pearce

02/20/18 ‐ 4:17pm ET February 20, 2018 at 4:17pm ET

I understand why the call options are up on that news today (for example, the CY March $18 options jumped 67% today), but still surprised that the equity is up that much on an otherwise weak day for the market. I wonder how much of the buy demand is from algo/program trading triggered by the jump in NXPI? I guess we’ll find out in the days to come when the bid/ask comes back to equilibrium. Sure would love it if CY got a buyout offer soon! 🙂

Dramatic License

02/26/18 ‐ 10:57am ET February 26, 2018 at 10:57am ET

Jim,
I note we have only 3 open positions right now. Are we expecting a correction soon, or is it just that nothing is really popping up of note from the software? Not complaining, just curious.

Jim Pearce

02/26/18 ‐ 11:06am ET February 26, 2018 at 11:06am ET

Actually, the recent correction should open up some opportunities for us soon, just want to be sure that it’s really over before diving headlong into a bunch of new positions. That said, I will be adding a new position later today that should benefit from higher inflation so it should benefit even if the rest of the market continues to gyrate over rising interest rates. In the meantime, Steve Leeb has made some very timely (and profitable!) index option trades for us so please be on the lookout for those since they tend to open and close fairly quickly.

Dramatic License

02/26/18 ‐ 11:21am ET February 26, 2018 at 11:21am ET

Thanks, Jim. Sounds great. I do appreciate Steve’s option posting. I was already in SPY, so still working with that myself.

C. Fisher

04/27/18 ‐ 4:08pm ET April 27, 2018 at 4:08pm ET

Can you comment on the recent earnings beat and drop in share value in CY? Left a note on the Aggressive Trader also. But curious if you folks see a sell in May and go away mentality forming?

Jim Pearce

04/30/18 ‐ 4:39pm ET April 30, 2018 at 4:39pm ET

I don’t think its that, but the current slump in this sector reminds me of what happened in the retail sector last year. I don’t buy into the notion of “peak memory chip”, so I think this sell-off is temporary so I’m inclined to ride it out.

Pat C.

04/30/18 ‐ 9:48am ET April 30, 2018 at 9:48am ET

What’s up with CY? It was up to $18.75 now down to almost $15. Approaching our stop loss. Terrible to let a gain turn into to a loss.

Jim Pearce

04/30/18 ‐ 4:34pm ET April 30, 2018 at 4:34pm ET

Cypress reported solid quarterly results at the end of last week (https://finance.yahoo.com/news/cypress-reports-first-quarter-2018-200500807.html), but it appears to be suffering along with the rest of the semiconductor sector. I don’t know how much longer that will last, but I am inclined to stick with it through the end of its target holding period (which expires on 6/11) so long as the company is performing well.

Benny K

06/06/18 ‐ 11:16am ET June 6, 2018 at 11:16am ET

Hi Jim,
Do you think there is some potential for CY to achieve its target of $22 in the near future? Trying to decide if I should roll my June 15 calls out to Oct. to see what the July earnings report yields.

Benny K

06/06/18 ‐ 11:22am ET June 6, 2018 at 11:22am ET

Sorry, I’m thinking of rolling my calls to Sept.

Benny K

06/11/18 ‐ 8:06am ET June 11, 2018 at 8:06am ET

Jim,
What is your outlook on CY in the near future? Trying to decide what to do with my June 15 calls.
I would appreciate your input.
Thanks

Jim Pearce

06/11/18 ‐ 9:26am ET June 11, 2018 at 9:26am ET

Hi Benny. I am still mulling over whether to extend the CY trade, and I will issue an alert at the end of today with my decision after I see how it trades. Thanks.

Jim Pearce

06/11/18 ‐ 3:24pm ET June 11, 2018 at 3:24pm ET

After looking at the technical indicators for CY I have decided to close out this position. I like it from a long-term perspective, but it may run into some resistance now that it is bumping up against its upper Bollinger Band. Also, a lot of implied volatility in the July options that could go either way. Better safe than sorry.

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