Friday, February 3, 2012

MENT: Computer design gear

Some people use computers. The more technically advanced build computers. The hard-core techsters design computers. And behind them stand the people who make the machines that the designers use.

Mentor Graphics Corp. (MENT) stands within that last category. And the company's machines get a workout, designing printed circuit boards, integrated circuits, field programmable gate arrays, embedded software solutions, wire harness systems, and computers.

MENT is headquartered in Wilsonville, Oregon, a bit south of Portland, on the fringes of the Silicon Forest.

MENT had the most bullish chart of 18 stocks added today to Zacks' strong-buy list. (See my essay "10,000 Charts" for a description of my screening methods.)

The price had a steep fall off in late February 2011, dropping from $16.56 down to $8.50 in early August 2011. Since then it has retraced nearly 80% of the decline, hitting a higher high today of $14.84 (so far).

However, MENT is not a blue-sky stock, and it faces resistance from any money that was left behind by the price decline. That money may well be looking to get out once it sees a break-even point, and that will tend to slow MENT's rise unless it is propelled higher by earnings surprises and other new information.

The return on equity, at 10%, is more in the slow-and-steady range, and MENT carries some long-term debt, producing a debt/equity ratio of 0.27. That's not a crippling level, but always, the lower the debt the better I like the stock.

Institutions love MENT. They hold 96% of the shares and have helped bid up the price/sales ratio. It takes $1.57 in stock to control $1 in sales.

MENT is moderately liquid, trading 686,000 shares a day on average. It has a good options inventory for such low volume -- 10 strike prices, and a reasonable bid/ask spread. 

However, the open interest is extremely low. Only two strike prices have open interest, and in both cases, there are fewer than 60 contracts.

Implied volatility, at 67%, is on the high side objectively but low historically for MENT. During much of the present leg up, MENT has had volatility around 100%. 

That level of volatility suggestions the best positions are short -- sold for net credit. But the open interest on options is too low for me to construct such a position. 

One way out of the dilemma would be to buy shares, and then sell covered calls, which provides a 4.4% six-week return for the March near out-of-the money call, equivalent to a price rise to $15.47.

MENT announces earnings after the Feb. 23 close. 

Decision for my account: I bought shares of MENT. I'll keep an eye on it and sell covered calls when I get a better sense of how high it might go before pausing.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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