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Despite some selling pressures early last week, the indexes rebounded nicely on nearly every small dip, and by week’s end the S&P 500 had gained 1%, the Dow was mostly unchanged, and the Nasdaq had risen by 1.8%.
The Stock – Howmet Aerospace (HWM)
Far from hurting suppliers to original equipment manufacturers (OEM) in the aerospace market, raw-material price inflation and a production slowdown in the commercial jet business (mainly at Boeing) are forcing carriers to fly older planes in order to keep up with an increase in flight departures. And this in turn is boosting aftermarket demand for many players, including Howmet, and is a big reason for the stock’s strength. The company is a leading provider of engineered metal products—mainly aluminum and titanium—used in aerospace, defense and commercial transportation applications, as well as fastening systems, bearings and forged aluminum wheels for heavy trucks.
The stock’s recent jump occurred after Howmet raised its profit estimate for the rest of the year on “robust” air travel demand that has exceeded pre-pandemic levels and, in the company’s words, “supports record aircraft OEM backlogs.” Revenue of $1.8 billion increased 14% from a year earlier in Q1, led by a 27% increase in engineered structure sales (due to growth in the commercial and defense aerospace markets). Additionally, earnings of 57 cents beat estimates by five cents, adjusted EBITDA (excluding special items) shot up 21% and Howmet generated $95 million in free cash flow, a big improvement versus the year-ago negative-$41 million. The solid cash flow generation supported management’s decision to repurchase $150 million in stock in Q1 (share count down 1.5% in the past year), with almost $550 million remaining on the buyback authorization.
Meanwhile, although ongoing quality issues related to Boeing’s best-selling 737 Max prompted Howmet to lower its delivery estimate of the plane, the firm’s higher revenue forecast (an overall $200 million increase in full-year guidance) is based on higher demand at its other business segments—and with Boeing and other OEM shipments sure to eventually pick up, Howmet should see things improve further in 2025 and beyond. Analysts see earnings up 30% this year and another 20%-plus in 2025, with more in store after that.
Technical Analysis
After correcting last fall, HWM took off in a powerful fashion in November on earnings, leading to a smooth, accelerating upmove that took the stock up to 70 in March. A multi-week consolidation followed, which served as a launching pad for last month’s earnings-induced leap to record highs and subsequent rally into the mid-80s. Now we’re seeing HWM take a minor breather, pulling back a smidge as the 25-day line catches up. Stop — 74
The Covered Call Trade
Buy Howmet Aerospace (HWM) Stock at 83.5, Sell to Open July 85 Strike Calls (exp. 7/19) for $1.75, or a Net Price of 81.75 or less
Static Return: $175 per covered call (2.14%)
Breakeven: 81.75
Covered Call Return (if assigned): $325 per covered call (3.97%)
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 81.75 or less. (In this case 83.5 minus 1.75 = 81.75. Or another example is you could pay 83 for the stock and sell the call for 1.25, which also equals 81.75)
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
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| Pan American Silver (PAAS) | 18.75 | 19.7 | 15.8 | June 19 -- $1.10 | $1.00 |
| Pinterest (PINS) | 41.5 | 44.5 | 35 | July 41 -- $2.75 | $4.00 |
| Oscar Health (OSCR) | 22.5 | 21 | 17 | July 22.5 -- $2.30 | $1 |
| Dutch Bros (BROS) | 36.35 | 40 | 31 | July 37.5 -- $1.65 | $3.50 |
| Robinhood (HOOD) | 20.85 | 22.5 | 16.8 | June 20.5 -- $1.60 | $2.25 |
| Sweetgreen (SG) | 30.45 | 32.35 | 25 | July 32 -- $2.10 | $3 |
The next Cabot Profit Booster issue will be published on June 18, 2024.
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