Cabot Profit Booster 173

While some sectors of the market look tired (growth), other sectors and stocks (retail, materials, financials, energy) continue to make new highs and/or come alive. Fortunately, the Cabot Profit Booster portfolio has avoided the hyper-growth stocks that are under pressure, and is positioned in stocks that are in the strongest sectors.

Cabot Profit Booster 173

This brings me to this week’s pick, which is an emerging stock in the energy sector that reported solid earnings last week.

The Stock – Matador Resources (MTDR)

Why the Strength

Energy stocks remain choppy, but some are finding support as the new thesis in the sector (less spending and production growth in exchange for huge cash flow even at modest prices) plays out.

Matador (which gets the vast majority of its production from the Delaware basin in Texas) looks like a smaller-cap leader in the group, and it’s regained some strength after Q1 results showed that its strategy took hold.

Total production was up 4% from a year ago, but costs fell off (drilling and completion costs per foot drilled are fading at double-digit rates), which, combined with somewhat higher prices and a growing midstream operation (its San Mateo Midstream subsidiary is solidly profitable) led to excellent profits—EBITDA was up 41% from the prior year, while Matador cranked out $64 million of free cash flow and paid off $100 million in debt. (There are no debt maturities until 2023 at this point.)

And there should be much more where that came from, with the top brass actually expecting production to rise at an 11% clip for the full year (Q1’s output was curtailed by bad weather), while CapEx will rise just 7% and cash flow will be solidly positive, allowing it to continue slashing its debt load while it started paying a token dividend (0.4% annually).

It’s worth noting, too, that Matador’s oil price received in Q1 was just $50 per barrel, so the longer prices stay up here (north of $60), the higher that figure should go. There’s nothing revolutionary here, just a well-run energy outfit with some great acreage, a reasonable growth plan and a huge cash flow profile in the quarters to come.

Technical Analysis

When we last wrote about MTDR in early February, shares had just broken out to multi-month peaks, and that rally continued into early March, when the stock stalled out near 27. What followed was a reasonable seven-week rest (including a little shakeout below the 50-day line) before the stock popped on mild volume before and after its quarterly report last week. Like everything else, MTDR did see some selling near its highs, so it may need a bit more seasoning, but we’re OK grabbing some shares here or on dips. Stop — 22

The Covered Call Trade

Buy Matador Resources (MTDR) Stock at 26.25, Sell to Open May 27.5 Strike Calls (exp. 5/21) for $0.75, or a Net Price of 25.50 or less

Static Return: $75 per covered call (2.94%)

Breakeven: 25.50

Covered Call Return (if assigned): $200 per covered call (7.84%)

Please note, we will also likely capture the $0.025 dividend.

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 25.50 or less. (In this case 26.25 minus 0.75 = 25.5. Or another example is you could pay 26 for the stock and sell the call for 0.50, which also equals 25.5)

Open Positions

If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on May 11, 2021.