February 23, 2022

I’m not going to sugar coat it: We are in a dodging rain drops type of market as every day a handful of stocks break down, and then continue to fall apart in the days that follow.

The same culprits continue to plague the market: historically heightened levels of inflation, upcoming Fed rate hikes, and escalating geopolitical tensions between Russia and Ukraine, with growth sectors taking the brunt of the pain. Last week the Dow lost 1.9%, the S&P 500 fell 1.6% and the tech-heavy Nasdaq dropped 1.8%. Year-to-date the Dow, S&P 500 and Nasdaq are lower by 6.2%, 8.8% and 13.4%, respectively.

Until we see some clarity in the areas of concern, the market could be in for some more rocky days/weeks like we have experienced since November, and that’s OK and normal.

Market Overview

I’m not going to sugar coat it: We are in a dodging rain drops type of market as every day a handful of stocks break down, and then continue to fall apart in the days that follow.

The same culprits continue to plague the market: historically heightened levels of inflation, upcoming Fed rate hikes, and escalating geopolitical tensions between Russia and Ukraine, with growth sectors taking the brunt of the pain. Last week the Dow lost 1.9%, the S&P 500 fell 1.6% and the tech-heavy Nasdaq dropped 1.8%. Year-to-date the Dow, S&P 500 and Nasdaq are lower by 6.2%, 8.8% and 13.4%, respectively.

Until we see some clarity in the areas of concern, the market could be in for some more rocky days/weeks like we have experienced since November, and that’s OK and normal.

It’s easy to forget, having just experienced one of the strongest bull runs in market history, that there are periods where the market falls. The S&P 500 rose 26.9% in 2021, and there were 70 trading days when the S&P 500 hit new highs, with only one 5% drawdown throughout the year.

Historically, the stock market’s general direction is higher. However, without a bit of risk in the market, there can’t be massive reward.

On that note … this week we are going to sell a covered call on Marathon Oil (MRO) which we recently traded successfully, though because of market conditions we are going to play this conservatively by selling an in-the-money call.

New Recommendation

The Stock – Marathon Oil (MRO)
Why the Strength
With oil prices just south of $100 a barrel, some of America’s largest drillers have decided to hold back production as the global energy market tightens. Marathon says it plans to keep oil production flat in 2022 and, after focusing last year on reducing debt, will now turn its attention to shareholder returns and growing financial metrics that matter most to its equity valuation.

These are just some of the reasons why Marathon, which operates in four different basins with the Eagle Ford and Bakken accounting for most of its production (while SCOOP, the Permian and an operation in Guinea comprise the rest), is one of our favorite stories in the energy space.

Last week, the company said it plans on returning “a compelling amount of capital” to its investors going forward. During the fourth quarter, Marathon returned over 70% of its cash from operations (above $800 million, or 90% of free cash flow) to investors—well above its minimum 40% commitment—and raised the base dividend 17% (a 1% yield). Marathon’s share buybacks since October led to an 8% reduction in share count, and all in a period of four-and-a-half months!

Key financial metrics were also impressive in Q4, including $1.8 billion in revenue that increased 110% from a year ago and beat expectations by 12%, plus per-share earnings of 77 cents that topped the consensus by 21 cents. The strong results prompted one major institution to upgrade its rating for Marathon on the assumption the company could buy back 45% of its shares over the next five years. Moreover, the firm said its “significant” leverage to oil means that every $1 per barrel increase translates to around $60 million in incremental free cash flow. We like it.

Technical Analysis
MRO had a strong rally in September and October, followed by a 19% pullback that nearly brought it back to its prior peak from last summer (at 14). But MRO got back into high gear starting in early January, rallying to new highs with the overall energy sector on good volume. Stop – 17.5

The Covered Call Trade
Buy Marathon Oil (MRO) Stock at 22.25, Sell to Open March 22 Strike Calls (exp. 3/18/2022) for $1.25, or a Net Price of 21 or less

Static Return: $100 per covered call (4.76%)

Breakeven: 21

Covered Call Return (if assigned): $100 per covered call (4.76%)

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 21 less. (In this case 22.25 minus 1.25 = 21. Or another example is you could pay 22.5 for the stock and sell the call for 1.50, which also equals 21)

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 March 1, 2022.