Chip Stock Red-Hot Ahead of Earnings

Why a premium-selling strategy may be prudent for TXN

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When we last checked in with semiconductor stalwart Texas Instruments Incorporated (NASDAQ: TXN), the stock was offering up several intriguing "buy" signals. Now, a little less than a month later, is red hot and worth a revisit. 

Texas Instruments will report first-quarter earnings after the market closes on April 27. Looking back at recent history, Texas Instruments has managed a clean sweep of outperforming earnings expectations over the past 12 months. However, that's only resulted in one positive post-earnings reaction, a 4.8% pop back in April 2020.

On the charts, TXN scored a record high of $197.58 on Monday. The stock is up 17% in 2021, yet 10 of 21 analysts maintain "hold" or "strong sell" ratings, which indicates there's ample room aboard the bullish bandwagon. Texas Instruments also offers a forward dividend of $4.08, equating to a dividend yield of 2.07%.

From a fundamental perspective, it is difficult to see how Texas Instruments stock can maintain its current growth rate for much longer. TXN is trading at a price-earnings ratio of 32.61 and has a forward price-earnings ratio of 30.03, which are both very high valuations for a company that hasn’t shown significant growth since 2018. In its most recent fiscal year reported, Texas Instruments had less than 1% revenue growth, which was off the back of taking a 9% revenue loss in fiscal 2019. However, the company's situation turned a bit more positive for TXN’s net income in fiscal 2020. Texas Instruments increased its bottom line by 11.5% in 2020 after a 10% drop in fiscal 2019.

One last note: Texas Instruments stock ranks low on the Schaeffer's Volatility Scorecard (SVS), with a score of just 18 out of 100. In other words, the security has consistently realized lower volatility than its options have priced in, making TXN a potential premium-selling candidate.

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