Market Overview
Despite the banking worries of last month, the S&P 500, Dow and Nasdaq have strung together three straight weeks of gains.
This week we are adding a semiconductor play, though doing so somewhat defensively by selling an in-the-money call.
The Stock – Onsemi (ON)
Why the Strength
A continued push toward electric vehicles (EVs) and clean energy systems is an enormous growth catalyst for companies that supply the semiconductors needed to power them. Onsemi is a leader in this space, with a focus on intelligent power and sensing technologies for the automotive and industrial end markets.
The silicon carbide (SiC) chips that Onsemi manufactures (and which can operate at higher voltages and temperatures than traditional silicon-based chips) are in high demand right now since they’re used to power sustainable energy grids, industrial automation, EVs, 5G and cloud infrastructure.
Last month, the company announced a partnership with BMW for Onsemi’s EliteSiC technology in the car maker’s electric drivetrains for a 400V DC Bus. Onsemi’s technology is also supporting the rapidly increasing demand for BMW’s premium EVs, and the firm also just announced an ultra-low power, automotive-grade microcontroller for wireless applications to be used by many vehicle manufacturers, who are increasingly favoring wireless connectivity to reduce the cost and weight of excess cabling.
To be fair, other parts of the business (mostly consumer-related) aren’t doing as hot, and the firm is still on a path to exit many lower-margin segments that will crimp margins this year. But that will be a good thing over time, with a focus on ramping SiC production to support long-term supply agreements, which is what big investors are focused on—Q4 was marked by record automotive revenue that grew a whopping 54%, in turn contributing to record 2022 sales of over $8 billion (up 24%). This year will be a transition, but the valuation is reasonable (15x trailing earnings) and growth should resume later this year and should carry on for a long time.
Technical Analysis
ON had a tough correction into July of last year, but it quickly ramped to all-time highs in the summer, and while the going has been very choppy since then because of the market, shares have etched higher highs and lows over time. And now we see some tightness (four tight weekly closes) followed by some good-volume accumulation last week. Stop — 71
The Covered Call Trade
Buy Onsemi (ON) Stock at 81, Sell to Open May 80 Strike Calls (exp. 5/19) for $6, or a Net Price of 75 or less
Static Return: $500 per covered call (6.66%)
Breakeven: 75
Covered Call Return (if assigned): $500 per covered call (6.66%)
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 75 or less. (In this case 81 minus 6 = 75. Or another example is you could pay 80 for the stock and sell the call for 5, which also equals 75)
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 11, 2023.
