February 15, 2022

The big news of last week was inflation data came in well above expectations on Thursday as the consumer price index (CPI) rose 7.5% year over year. This was the largest increase since 1982.
Shortly after, rumors of an emergency rate hike made the rounds on trading desks as the 10-year Treasury yield pierced the 2% mark for the first time in three years. Following this development, rate-sensitive sectors and growth stocks underperformed.

Market Overview & New Recommendation

Before we dive into this week’s idea, we do have to exit our Goodyear Tire (GT) position as the stock fell through our stop following earnings late last week. To do so, we need to:

Sell GT Stock

Buy to Close the GT February 22 Call

After this trade is executed, we will no longer own a stock or option position in GT.

Moving on …

The big news of last week was inflation data came in well above expectations on Thursday as the consumer price index (CPI) rose 7.5% year over year. This was the largest increase since 1982.

Shortly after, rumors of an emergency rate hike made the rounds on trading desks as the 10-year Treasury yield pierced the 2% mark for the first time in three years. Following this development, rate-sensitive sectors and growth stocks underperformed.

Throw in a bit of geopolitical uncertainty in Ukraine, and you can clearly see the challenges the market faced last week as the Dow lost 1.0%, the S&P 500 fell 1.8% and the tech-heavy Nasdaq dropped 2.2%. Year-to-date the Dow, S&P 500 and Nasdaq are lower by 4.4%, 7.3% and 11.8%, respectively.

Today, I’m adding Occidental Petroleum (OXY), an American company engaged in hydrocarbon exploration in the United States, the Middle East, and Colombia as well as petrochemical manufacturing in the United States, Canada, and Chile.

The Stock – Occidental Petroleum (OXY)
Why the Strength

The oil story is fairly well known at this point, so some sort of shakeout is always possible, but the evidence still suggests that the cash flow stories in the sector are far from fully appreciated.

One newer name (for Top Ten anyway) is Occidental Petroleum, which has had a so-so history as it got too diversified for its britches and took on way too much debt in years past; the company has only recently completed a whopping $10 billion divestiture program, leaving it with core operations in the Permian, the Rockies and a little in the Gulf of Mexico and overseas, along with a profitable chemical operation that’s a global leader in caustic soda (helps make soaps, paper and petroleum products) and is the third-largest U.S. maker of PVC (Polyvinyl chloride, used to make pipes, doors and windows).

The acreage is great (Occidental has by far the largest number of top-producing wells in the Delaware basin), which along with the chemical business has led to a torrent of free cash flow of late (nearly $2.50 per share in Q3 alone!), though most of that has gone to debt reduction—Occidental paid back $4.3 billion in Q3 alone and tendered another $1.5 billion or so in December, getting the total figure down to $29 billion-ish.

Here’s why that’s key: Management has said it wants debt to decrease to the “mid-$20 billion range” before it starts boosting returns to shareholders, so it’s possible the firm could hit its target pretty soon—which in turn means it could start paying out huge dividends and/or buying back shares within a quarter or two. And that’s assuming energy prices ease back 10% or 20%–if they stay up here who knows how big free cash flow could be, even if the firm does expand output some.

All in all, Occidental looks like it’s just turning the corner in terms of shareholder returns, and Wall Street is rewarding them for it.

Technical Analysis
OXY hasn’t really been a leader in the oil group—after topping just below 33 last March, the stock suffered through three sharp corrections (31%, 35% and 27%), with no net progress through January of this year. But now we’re seeing a change in character, not just because the stock has moved to new highs but because of the volume (three straight weeks of above-average buying) and persistency, too. We’ll set our buy range down a bit, aiming to grab shares on a shakeout. Stop—33.5

The Covered Call Trade
Buy Occidental Petroleum (OXY) Stock at 40, Sell to Open March 40 Strike Calls (exp. 3/18) for $2.50 or a Net Price of 37.50 or less

Static Return: $250 per covered call (6.67%)

Breakeven: 37.50

Covered Call Return (if assigned): $250 per covered call (6.67%)

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 37.50 or less. (In this case 40 minus 2.50 = 37.50. Or another example is you could pay 41 for the stock and sell the call for 3.50, which also equals 37.50.)

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 …

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 February 22, 2022.

Copyright Notice

The Stock – Occidental Petroleum (OXY)
Why the Strength

The oil story is fairly well known at this point, so some sort of shakeout is always possible, but the evidence still suggests that the cash flow stories in the sector are far from fully appreciated.

One newer name (for Top Ten anyway) is Occidental Petroleum, which has had a so-so history as it got too diversified for its britches and took on way too much debt in years past; the company has only recently completed a whopping $10 billion divestiture program, leaving it with core operations in the Permian, the Rockies and a little in the Gulf of Mexico and overseas, along with a profitable chemical operation that’s a global leader in caustic soda (helps make soaps, paper and petroleum products) and is the third-largest U.S. maker of PVC (Polyvinyl chloride, used to make pipes, doors and windows).

The acreage is great (Occidental has by far the largest number of top-producing wells in the Delaware basin), which along with the chemical business has led to a torrent of free cash flow of late (nearly $2.50 per share in Q3 alone!), though most of that has gone to debt reduction—Occidental paid back $4.3 billion in Q3 alone and tendered another $1.5 billion or so in December, getting the total figure down to $29 billion-ish.

Here’s why that’s key: Management has said it wants debt to decrease to the “mid-$20 billion range” before it starts boosting returns to shareholders, so it’s possible the firm could hit its target pretty soon—which in turn means it could start paying out huge dividends and/or buying back shares within a quarter or two. And that’s assuming energy prices ease back 10% or 20%–if they stay up here who knows how big free cash flow could be, even if the firm does expand output some.

All in all, Occidental looks like it’s just turning the corner in terms of shareholder returns, and Wall Street is rewarding them for it.

Technical Analysis
OXY hasn’t really been a leader in the oil group—after topping just below 33 last March, the stock suffered through three sharp corrections (31%, 35% and 27%), with no net progress through January of this year. But now we’re seeing a change in character, not just because the stock has moved to new highs but because of the volume (three straight weeks of above-average buying) and persistency, too. We’ll set our buy range down a bit, aiming to grab shares on a shakeout. Stop—33.5

The Covered Call Trade
Buy Occidental Petroleum (OXY) Stock at 40, Sell to Open March 40 Strike Calls (exp. 3/18) for $2.50 or a Net Price of 37.50 or less

Static Return: $250 per covered call (6.67%)

Breakeven: 37.50

Covered Call Return (if assigned): $250 per covered call (6.67%)

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 37.50 or less. (In this case 40 minus 2.50 = 37.50. Or another example is you could pay 41 for the stock and sell the call for 3.50, which also equals 37.50.)

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 …

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 February 22, 2022.