After a dismal 2019, when semiconductor sales fell 12% to $412 billion, the World Semiconductor Trade Statistics organization predicts that they will rise 3.3% in 2020 and 6.2% in 2021. But today’s recommendation is doing a lot better than the average chip company.
Cabot Profit Booster 144
This year has had enough twists and turns to make even the most veteran of traders nauseous. And last week’s announcement that the President had tested positive for the coronavirus was yet another wrinkle that sent the market spiraling in the short term.
Despite these many ups and downs, the Cabot Profit Booster portfolio remains in spectacular shape as our five open positions are all at nice profits.
As I continue to say, at some point we will have a trade go sideways, but until then we will keep pushing forward with covered calls on the best of stocks and with a diversified portfolio. Which leads me to this week’s idea:
The Stock – STMicroelectronics (STM)
After a dismal 2019, when semiconductor sales fell 12% to $412 billion, the World Semiconductor Trade Statistics organization predicts that they will rise 3.3% in 2020 and 6.2% in 2021. But STMicroelectronics is doing a lot better than the average chip company.
The company just increased its sales projections after a significant rise in demand for its automotive products and microcontrollers. It is now forecasting third quarter revenues of $2.67 billion, up from the $2.45 billion it had predicted in July; the new figure would be 28% higher than Q2 sales. CEO Marc Chery also commented that full year revenues will be more than $9.65 billion, better than the previous range forecast of $9.45 billion. (Earnings for the third quarter will be reported on October 22.)
Backing out to the big picture, STMicroelectronics provides more than 100,000 customers around the world with its chips that the company says “enable smarter mobility, more efficient power and energy management, and the wide-scale deployment of the Internet of Things and 5G technology.” It continues to pioneer cutting-edge technologies, including its latest—MasterGaN®, which is expected to speed up the development of next-generation smartphone ultra-fast chargers and wireless chargers, USB-PD compact adapters for PCs and gaming, as well as in industrial applications like solar-energy storage systems, uninterruptible power supplies and high-end OLED TVs and cloud servers.
Translation: The firm’s chips play into some of the faster growing end markets out there, which adds to the confidence that, after a virus-related hiccup this year (earnings down 19%), ST Micro will be back on track in 2021 (earnings expected to rise 61%, and up 30% from 2019’s figure).
Technical Analysis
STM has been rebounding with everything else since the March bottom, but it wasn’t particularly powerful, with a two-steps-forward, one-step-back type of advance for many months. After getting back to its pre-pandemic high, shares went sideways for 10 weeks, but last week’s guidance hike brought back the buyers, with STM pushing to new highs on solid volume. Stop – 28.5
The Covered Call Trade
Buy STMicroelectronics (STM) Stock at 33, Sell to Open November 35 Strike Calls (exp. 11/20/2020) for $1.30, or a Net Price of 31.70 or less
Static Return: $130 per covered call (4.1%)
Breakeven: 31.7
Covered Call Return (if assigned): $330 per covered call (10.41%)
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 31.70 or less. (In this case 33 minus 1.30 = 31.70. Or another example is you could pay 32.75 for the stock and sell the call for 1.05, which also equals 31.70)
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
