Market Overview
While the action under the surface was hardly encouraging, in the face of plenty of hawkish headlines from the Fed it was impressive that the S&P 500 gained 1.4%, the Dow rallied 1.44%, and the Nasdaq added 1% last week.
This week we are adding a position in a leading copper player, though because the company will report earnings this Friday, we will be selling an in-the-money call.
The Stock – Freeport-McMoRan (FCX)
Why the Strength
A rebound in China’s manufacturing sector following last year’s lockdowns has surprised even the most optimistic forecasts, in turn pushing prices for key industrial metal copper to higher levels. Moreover, the acceleration of the energy transition in the U.S. and other countries is putting heavy demand on copper, which is used in electric vehicles (EVs), solar panels and other renewable energy infrastructure applications. This is where Freeport enters the picture.
Aside from being a top 10 gold producer, the company is the world’s second-largest copper producer by output, with operations in several continents, and its earnings are highly leveraged to the red metal’s price, making it something of a copper pure play.
Freeport posted sales volumes of more than 4.2 billion recoverable pounds of the metal last year, a 10% improvement from 2021, as the transition to EVs (which use up to three times the amount of copper compared to traditional vehicles) kept demand buoyant. Freeport’s gold sales volumes, meanwhile, soared by an eye-opening 34% in 2022, and with the prices for both metals on the rise, the outlook for 2023 is looking especially sanguine, but copper is the key driver here. (Indeed, analysts estimate that copper demand will double by 2035, with one major Wall Street bank forecasting prices could rise by 22% this year, based largely on energy transition demand.)
Going forward, the firm is expected to hold copper production steady at around 4.2 billion pounds over the next three years. Analysts expect modest revenue growth this year and a 5% sales bump in 2024, but this is likely to prove too conservative given that a) global stockpiles of the metal are tight after just hitting an 18-year low, and b) green energy demand is ramping up. Earnings are expected out on Friday (April 21).
Technical Analysis
FCX mostly traded in line with the copper price last year, hitting a high mark in late March at 52 and turning south from there before bottoming at 25 in mid-July. The stock spent three months etching out a base, from which a blast-off occurred in October. The rally lost steam in January at 47 and FCX ground its way down to the 40-week line last month, where it found strong support. Stop — 36
The Covered Call Trade
Buy Freeport McMoRan (FCX) Stock at 43, Sell to Open May 42 Strike Calls (exp. 5/19) for $2.40, or a Net Price of 40.60 or less
Static Return: $140 per covered call (3.44%)
Breakeven: 40.60
Covered Call Return (if assigned): $140 per covered call (3.44%)
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 40.60 or less. (In this case 43 minus 2.40 = 40.60. Or another example is you could pay 42.75 for the stock and sell the call for 2.15, which also equals 40.6)
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 April 25, 2023.
