While the headlines read “S&P 500 at All-Time Highs,” it’s not all smooth sailing in the market as countless stocks are still suffering from the Nasdaq rout that started a month ago.
Cabot Profit Booster 169
While the headlines read “S&P 500 at All-Time Highs,” it’s not all smooth sailing in the market as countless stocks are still suffering from the Nasdaq rout that started a month ago.
That being said, the Profit Booster portfolio remains in great shape as we continue to keep the portfolio in the strongest stocks from a variety of sectors. With that strategy in mind, this week’s idea is an emerging leader in the materials sector.
The Stock – Cleveland-Cliffs (CLF)
Why the Strength
China’s economy is one of the top buyers of steel, and the boom over there after last year’s pandemic is a big reason why iron ore (one of the key inputs into steel) demand is surging. Meanwhile in the U.S., the likelihood of increased infrastructure spending is boosting prices for hot-rolled coil steel. Both of these are welcome news items for Cleveland-Cliffs as the Ohio-based iron ore and steel producer is positioned for a global recovery.
Fourth-quarter results provided some insights into why things are rolling for the company—its order book was strong, particularly for consumer goods, while automotive demand increased as automakers struggled to keep up with resilient consumer buying. What’s more, the company is selling more steel to select service centers and manufacturing clients outside the auto sector in a move to diversify.
Cleveland-Cliff’s recent acquisitions of AK Steel and ArcelorMittal USA is part of this diversification and contributed to the quarter’s eye-popping 322% revenue increase. The acquisitions also provide a considerable advantage over other domestic producers by making the firm the largest flat-rolled steel producer in North America. The additions are part of the company’s transition from an iron ore miner to a vertically integrated steelmaker, which means its iron ore needs are now met in-house.
Best of all, the momentum in the business continues— management just released estimate-beating earnings guidance for Q1 and Q2 and gave an optimistic outlook for the remainder of 2021 (a big reason for the latest strength). Analysts see the bottom line surging to nearly $2.50 this year before backing off in 2021. Earnings are likely out later this month.
Technical Analysis
CLF is another cyclical stock that had a bad couple of years, crashed last March, but got going last November and had a scintillating run. Sellers finally made a stand near 19 in January, which led to a three-month, double-bottom base, mostly between 14 and 19. Last week’s guidance hike caused a fresh breakout; there could be some near-term wiggles. Stop — 16
The Covered Call Trade
Buy Cleveland-Cliffs (CLF) Stock at 19.75, Sell to Open May 20 Strike Calls (exp. 5/21/2021) for $1.75, or a Net Price of 18 or less
Static Return: $175 per covered call (9.72%)
Breakeven: 18
Covered Call Return (if assigned): $200 per covered call (11.11%)
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 18 or less. (In this case 19.75 minus 1.75 = 18. Or another example is you could pay 19.5 for the stock and sell the call for 1.50, which also equals 18)
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 13, 2021.