Selling Jul 25 Puts on American Superconductor (Nasdaq:AMSC)
Posted: 26 February 2010 08:02 AM   [ Ignore ]  
Total Posts:  49
Joined  2008-05-06

February 26, 2010 – Yesterday in our commentary we advocated selling July 25 puts on American Superconductor (Nasdaq:AMSC), which would have brought in about $2.45 in premium. Here is our thought process behind the trade:

We like the fundamental story:

• American Superconductor is a leader in growth industries (wind, smart grid) in growth markets (China).

• Tremendous level of success and execution –forecasting 70% earnings growth in FY10 to $1.15/share, $135 million in cash, no debt, forecasted FY10 revenues of $400 million and another $350 million in backlog

• Setting up for new opportunities to drive further growth – Superconductor business (carries more power and reduces choke points on the grid, as well as makes them smart); U.S. Wind market (entering market through China partners and also expected to announce at least one U.S. licensee this year); Offshore Wind (gaining traction here, with installs in the field (water) and developing the massive 10MW Sea Titan (btw – management expects its superconductor technology will help it address key engineering challenges here to provide a competitive advantage at this rating); and Utility Scale Solar (it is already an expert in bringing utility scale wind onto the grid (DVAR expertise), and will use that expertise to transition its core technology to the utility scale inverter market for the solar industry). Each of these is at least a billion dollar market opportunity.

Selling Puts is a Prudent and Disciplined Way to Own Stocks at a Lower Price

• The stock was trading at about $27.50 yesterday when we recommended selling the July 25 Puts for $2.45. If the stock declines between now and July to below 25 and the stock gets put to you, you own it at $22.55 ($1.01B market cap), or at about 3.2x this year’s forecasted revenue, and 84x this year’s forecasted earnings (still a bit expensive here). Against next year’s forecasted revenues and income, a $22.55 entrance point would be about 2.52x FY10 forecasted revenue and 19x FY10 forecasted income.

We think this is an attractive entrance level for the stock. Past performance is no indication of future performance, but the stock ran from about $13 to $43 in the last 10 months and now back to $27-28, on nothing short of good news and execution. We see the pullback here as an opportunity to begin position building. We would obviously like to map out entrance points closer to 10x forecasted income, but that would require a pullback all the way to the $13-$15 level again and we think it would probably take a broader market selloff back to March 09 levels to get us there.

So our strategy, as always, would be to reserve some cash to build on this strategy if the stock drops materially. In the meanwhile, at least we have staked out a path to a position, and we are getting paid $2.45 to do it.

Now, if the stock runs higher then we will trade the short put position itself, either letting it expire and keeping the entire premium (100% gain on the put), or at some respectable return if we choose to purchase the put back to close the position.

Important Disclosure:

This information is intended to assist investors.  The information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice.  Any such offer, if made, will only be made by means of a confidential prospectus or offering memorandum or management agreement.  It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future results or expectations.  As with all investments, there are associated risks and you could lose money investing.  Prior to making any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of that investment