Cabot Profit Booster 177

The market has strengthened again, which is great for our three open covered call positions, all of which are trading above the strike price of the call we sold. That being said, a sideways market is also fine for our volatility selling strategy, that is focused on buying the strongest stocks, while keeping the portfolio diversified.

Cabot Profit Booster 177

The market has strengthened again, which is great for our three open covered call positions, all of which are trading above the strike price of the call we sold. That being said, a sideways market is also fine for our volatility selling strategy, that is focused on buying the strongest stocks, while keeping the portfolio diversified.

This eye on diversification is what brings me to this week’s pick, which is a natural gas company that is breaking out to a new recent high.

The Stock – Range Resources (RRC)
Why the Strength
Range Resources is another turnaround energy play, but as opposed to most of the others we’ve written about, Range has a different focus—it’s one of the top 10 producers of natural gas and liquids (70% of production is natural gas), and it’s the top liquid exporter among independent explorers.

Still, the same factors driving its oily peers are why this stock is strong today: Range has very low maintenance costs, has a ton of inventory (nearly half a million acres in Appalachia with an estimated 16 years of drilling inventory), is keeping production relatively level while focusing on debt reduction (three straight years of slashing debt with more on the way) and free cash flow.

While Range doesn’t give a free cash flow outlook that we can find, it has a very low breakeven price (something like $2.28 natural gas, compared to a realization of $3.20 in Q1) and states in its presentations that it expects “significant” and “sustainable” free cash flow, with shareholder returns likely to pick up once it hits its debt targets—and given the prices it’s fetching, it thinks it can hit those debt targets sooner rather than later.

Moreover, given that the industry as a whole is so focused on free cash flow/debt reduction, the likelihood of oversupply is greatly reduced. Trading at less than 1.5 times this year’s expected revenue, Range looks like an undervalued, profitable energy outfit that could be a cash cow if current energy prices stick or advance.

Technical Analysis
RRC was at 95 in 2014 and spent six years declining to less than 2 at last year’s crash. The immediate recovery from that low was sharp (back to 8 by June), but then it began a very long, tedious period of chop—the stock was still hovering at 8 a few weeks ago. But now RRC looks like it’s changed character, with four straight above-average volume weeks driving the stock up to 14, followed by today’s sector upmove. Stop — 12

The Covered Call Trade
Buy Range Resources (RRC) Stock at 14.50, Sell to Open June 14.5 Strike Calls (exp. 6/18) for $0.60, or a Net Price of 13.90 or lessStatic Return: $60 per covered call (4.31%)Breakeven: 13.90Covered Call Return (if assigned): $60 per covered call (4.31%)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 13.90 or less. (In this case 14.5 minus 0.60 = 13.9. Or another example is you could pay 14.40 for the stock and sell the call for 0.50, which also equals 13.90)

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 June 8, 2021.

Cabot Wealth Network
Publishing independent investment advice since 1970.

President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
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