Precious metal stocks have become mixed of late as economic optimism has increased, but some are still strong, and today’s recommendation is one of them.
Cabot Profit Booster 126
The Cabot Profit Booster portfolio remains in spectacular shape aided by a strong stock market, great stock picks from Cabot Top Ten Trader chief analyst Mike Cintolo and our covered call strategy.
That being said, at some point the market will cool off, and for that reason this week we are going to add a precious metals stock to the portfolio to continue to diversify. Here is the stock and the trade …
The Stock – Pan American Silver (PAAS)
Precious metal stocks have become mixed of late as economic optimism has increased, but some are still strong, and Pan American Silver is one of them.
Despite the name, the company’s purchase of Tahoe Resources in early 2019 has made it a diversified play—the company is one of the largest silver plays out there, but it’s actually doing more business in gold these days simply because gold prices have trended up over time while some silver mines have shuttered.
The company has nine mining operations in the U.S., central and south America, including the giant Escobal mine in Guatemala, which is a giant, already-built silver reserve that could come back online down the road. In Q1, silver production actually slipped 9% across the company has a whole, but gold production nearly doubled even as costs per ounce eased. Combined with rising prices, that sent revenues up more than 40%, while cash flow from operations came in at $114 million (more than 50 cents per share). And the future looks even brighter—while gold prices have leveled off some, they remain elevated at north of $1,600 per ounce, and silver prices are now nearing $17 per ounce, up from $11 at the March crash lows. Throw in expanding production levels as some mines re-open as the virus clears up and analysts see 37% earnings growth this year and a near-tripling of the bottom line in 2021.
There’s nothing revolutionary here, but should silver continue its rise (it’s more economically sensitive than gold), even those figures should prove conservative.
Technical Analysis
PAAS had a long downtrend end in May 2019, and then enjoyed a solid uptrend to 26 in February. Like most precious metals stocks, PAAS got hammered during the crash but immediately snapped back and hasn’t stopped for breath—shares have lifted eight of the past nine weeks, with big-volume buying up during the past three. Stop - 24
The Covered Call Trade
Buy Pan American Silver (PAAS) Stock at 30.25, Sell to Open July 31 Calls (exp. 7/17/2020) for $1.75, or a Net Price of 28.5 or less
Static Return: $175 per covered call (6.14%)
Breakeven: 28.5
Covered Call Return (if assigned): $250 per covered call (8.77%)
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 28.5 or less. (In this case 30.25 minus 1.75 = 28.5. Or another example is you could pay 30 for the stock and sell the call for 1.50, which also equals 28.5)
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
