This week we are adding Alcoa (AA), which has held up very nicely during the recent market malaise.
Market Overview
First, a scheduling note: Next Tuesday (December 28) is the second of our two regular weeks off a year for Profit Booster. Have a great holiday season!
This past week was another up/down/down/down type of week as the indexes continue to be wild day-to-day, but big picture have been losing some ground. And while the losses in the leading indexes haven’t been dramatic, as has been the case since Thanksgiving the majority of individual stocks continue to fall.
That being said, the “upside” to this kind of market and stock volatility is the price of options has risen dramatically, which means the yields that we can capture via covered calls are also rising.
This week we are adding Alcoa (AA), which has held up very nicely during the recent market malaise.
New Recommendation
The Stock – Alcoa (AA)
Why the Strength
A combination of lower inventories and improving demand from top consumer China are pushing aluminum prices to their highest levels in over a decade, which is welcome news for Alcoa, one of the world’s largest aluminum producers.
The company has also captured interest with its latest balance sheet enhancement efforts by offloading legacy liabilities, a move that removes nearly $1.5 billion in pension obligations. Further contributing to the strength was the recent announcement that it will close 146,000 tons of aluminum smelting capacity at its Wenatchee Works plant in Washington as part of its five-year review of operating assets. (An additional contribution to the latest strength was the firm’s inclusion in the S&P 400 MidCap index.)
And while these bullish factors prompted a major institution to give Alcoa a “conviction buy” rating, the upgrade was also due to Alcoa’s efforts at decarbonizing its portfolio while supporting the “green transition.”
On the financial front, revenue was up by a solid 31% from a year ago in Q3, above estimates and driven by higher aluminum prices and higher premiums for value-added products. The firm also set a record for quarterly net income, with per-share earnings of $2.05 beating the consensus by 29 cents. The strong results prompted management to initiate a quarterly cash dividend of 10 cents per common share and launch a $500 million stock buyback plan. On the liquidity front, Alcoa had a cash balance of nearly $1.5 billion at quarter’s end, with no substantial debt maturities until 2027. Best of all is that these elevated earnings look likely to stick—analysts see the bottom-line north of $6 per share in 2022.
Technical Analysis
AA more than doubled between February and early May before hitting the wall at just under 45. This led to a (normal) 25% correction that didn’t compromise the longer-term uptrend. Shares also rounded out a base after this correction, and by August, AA was off to the races again. Shares spent eight weeks consolidating following the latest peak at 57 and are perking up once again. Volatility is extreme, but we like the recent upside volume—we’re fine starting small here if you want to take a stab at it. Stop — 44.5
The Covered Call Trade
Buy Alcoa (AA) Stock at 55, Sell to Open January 55 Strike Calls (exp. 1/21) for $4, or a Net Price of 51 or less
Static Return: $400 per covered call (7.84%)
Breakeven: 51
Covered Call Return (if assigned): $400 per covered call (7.84%)
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 51 or less. (In this case 55 minus 4 = 51. Or another example is you could pay 55.5 for the stock and sell the call for 4.50, which also equals 51)
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.
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option – Price of Call Sold | Current Option Price |
| Goodyear Tire (GT) | 22.93 | 20.00 | 19.5 | ||
| Pure Storage (PSTG) | 33.15 | 32.30 | 26.5 | January 33 — $2.25 | $1.50 |
| Ciena (CIEN) | 74.20 | 75.00 | 64.0 | January 75 — $2.50 | $2.50 |
The next Cabot Profit Booster issue will be published on January 4, 2022.
Cabot Wealth Network
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President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
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