With the Dow Jones Industrial Average losing ground for five straight weeks, I can't blame you for not wanting to plunk down more cash into this market. But that doesn't mean you shouldn't be investing right now. In fact, there's a way you can earn income while you wait to buy stocks on the cheap.
Right now, I've got my eye on an inexpensive electronics component supplier, TTM Technologies (Nasdaq: TTMI ) , that is growing nicely thanks to its tablet and smartphone exposure. Writing puts on TTM will provide some income and downside protection, but still let me purchase shares if they get dragged down with this market.
Here's the opportunity I see right now.
There's money in those guts
TTM makes printed circuit boards (PCBs) that provide the base to support and connect other higher-tech electronic components that keep our gadgets whizzing, whirling, flashing, and tweeting. They're the guts of our connected world. And although PCBs are largely cheap and commoditized, TTM has carved out a niche by providing slightly more specialized PCBs for high-tech consumer electronics (think smartphones and tablets) and computer networking equipment. The company's end markets are expected to grow more than 10% per year through 2014. Recently, demand has been so strong that TTM is considering adding to its previously announced plans to spend $115 million to expand its facilities.
Need evidence of demand for the company's products? Look no further than the obvious computing trends. TTM's tech prowess has earned it the respect and checkbook of consumer-electronics king Apple (Nasdaq: AAPL ) . Each of the 4.7 million iPads Apple sold last quarter runs on a TTM circuit board, and that growth only accelerates as the iPad debuts in more and more international markets.
But TTM isn't beholden to the fickle consumer-electronics market. It also sells into the very stable defense and aerospace industries. Companies like Northrop Grumman (NYSE: NOC ) and Raytheon (NYSE: RTN ) use its PCBs in their missile guidance systems and radar detection devices. And while competitors Cisco Systems (Nasdaq: CSCO ) and Juniper Networks (Nasdaq: JNPR ) are battling it out in the networking communication business, TTM sells to both of them, so we don't have to pick a winner. Slightly more than half of the company's revenue comes from these stable business lines, giving TTM a stable foundation on which to build its consumer business.
TTM shares look cheap
Even with revenue and earnings expected to grow by more than 25% this year, and another 8% and 15% next year, TTM shares are only trading at eight times next year's earnings. The company generates more than $130 million in free cash flow, so its $500 million in debt load looks manageable. I think shares could be worth $20, based on the company's growth prospects, mildly rising input prices, and an eventual moderation of capital spending. I've considered buying shares outright given this view, but I think writing put options may offer an even more compelling opportunity.
Selling puts, earning income
A put option represents the right to sell a stock at a certain price on or before a specific date. Thus, writing puts means that you promise to buy a stock at an agreed-upon price (the strike price) in exchange for a bit of cash. Using written puts to potentially establish ownership in solid businesses, while earning a little income in the meantime, is a sensible way to invest using options.
We can write a put option expiring in September to potentially purchase TTM shares at $12.50 and be paid $0.95. It doesn't sound like much, but that equates to a 7% yield in just three and a half months. And if TTM shares get caught up in the market's slide, we may have a chance to buy them at a great price. With the $0.95 payment, our effective buy price on shares would be $11.55 -- a steal, considering that I think shares are worth closer to $20. Here are some of the recent details on this written put:
TTMI Written Put
|The option||September 2011 $12.50 Put|
|Option price||$0.95 per contract|
|TTMI stock price||$13.40|
|Capital at risk (the most we can lose)||$12.50|
|Max option reward||$0.95|
Data from Yahoo! Finance near market close on June 10.
As you can see, we don't start losing money unless TTM shares drop below $11.55 -- 11% below where they trade today. And if that happens, we'll be forced to buy shares that we already said were a good bargain, so that's not a terrible outcome. Remember, because each option represents 100 shares of stock, each written put represents a potential obligation of $1,250, so size your bet accordingly. And if TTM shares don't drop below our $12.50 strike price, we'll simply keep our $0.95 per share in option premium, and feel comfortable that we earned a decent yield in a market that had us spooked to begin with.
Just scratching the surface
Writing puts to earn income and buy shares of business we like at great prices is just one of the strategies our team at Motley Fool Options uses on a regular basis. Drop your email address in the box below to discover more ways you can use options on popular stocks to keep afloat and make money in this market.