This Friday is the expiration of our six April Covered Call positions. I would categorize these six positions as a good, but somewhat mixed bag, as only one trade looks like it will expire for its full profit potential (ANF), while four (TRIP, SUM, AMKR, AZEK) are in good shape but may need attention in the week to come, and one (ZI) which is mostly trading at a breakeven. As is always the case, I will update on where we stand with these expiring positions Thursday afternoon or Friday morning.
Cabot Profit Booster 170
This Friday is the expiration of our six April Covered Call positions. I would categorize these six positions as a good, but somewhat mixed bag, as only one trade looks like it will expire for its full profit potential (ANF), while four (TRIP, SUM, AMKR, AZEK) are in good shape but may need attention in the week to come, and one (ZI) which is mostly trading at a breakeven. As is always the case, I will update on where we stand with these expiring positions Thursday afternoon or Friday morning.
With six stocks likely coming out of our portfolio this week, our exposure to the market will be as light as it’s ever been at Cabot Profit Booster. And with the market in good shape, we need to address that via a new Covered Call trade …
The Stock – Goodyear Tire & Rubber (GT)
Why the Strength
Manufacturing plant shutdowns and a dry-up in auto demand negatively impacted the U.S. tire industry last year, but with the economy rebounding and auto sales surging, tire demand has revived, boosting Goodyear’s outlook.
Beyond the red-hot auto market, this stock’s recent strength follows Goodyear’s move to acquire long-time rival Cooper Tire for $2.5 billion. Announced in late February, the acquisition will expand Goodyear’s product offering and increase its distribution and retail channels, while combining both companies’ strengths in the SUV category and likely lead to a lot of synergies. When the deal closes (later this year), analysts expect the result to be a combined outfit with nearly $18 billion in annual revenue with double Goodyear’s current presence in the highly profitable China tire market (where car deliveries are expected to increase 8% this year).
The Q4 report provided additional support for the bullish outlook: While the top line of $3.7 billion slid a bit (down 2%, due mainly to unfavorable FX factors), it also boasted earnings of 44 cents per share (up 132% from the year before and 25 cents above estimates). Plus, the company reported a surprising 3% increase in revenue per tire in the quarter despite lower tire volumes. Additionally, Goodyear delivered its highest fourth quarter free cash flow since 2011, thanks to cost management and improved earnings.
Analysts expect sales to increase 13% in Q1, followed by even bigger growth in Q2 (up 65% thanks to easy comparisons). Goodyear guided for the strong momentum to continue well into 2021 and plans to expand its service network and broaden its reach with small and medium truck fleets. Upcoming roll outs of fuel-saving tires for the light vehicle and long-haul markets should provide an additional boost. Analysts see earnings north of 80 cents per share this year and double that in 2022.
Technical Analysis
After peaking at 37 in 2017, GT entered a steady decline which ended last year when the stock hit a nadir of 4. The turnaround that followed was slow to gain traction at first, as GT spent several months stuck in a lateral range between 8 and 12.
But in February, shares broke out of that range after a string of analyst upgrades, followed by the huge-volume rally on the Cooper acquisition news. The five-week consolidation since then looks normal to us, allowing some moving averages to catch up. We’re OK taking a swing at the stock here. Stop — 14.5
The Covered Call Trade
Buy Goodyear Tire & Rubber (GT) Stock at 18, Sell to Open May 18 Strike Calls (exp. 5/21) for $0.80, or a Net Price of 17.20 or less
Static Return: $80 per covered call (4.65%)
Breakeven: 17.20
Covered Call Return (if assigned): $80 per covered call (4.65%)
Please note, we may also capture the $0.16 dividend during the course of holding our position.
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 17.20 or less. (In this case 18 minus 0.80 = 17.20. Or another example is you could pay 17.80 for the stock and sell the call for 0.60, which also equals 17.20).
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
The next Cabot Profit Booster issue will be published on April 20, 2021.