This week I’m adding an energy stock engaged in hydrocarbon exploration, Marathon Oil (MRO).
After a stellar 2021, the bears took over the first week of 2022 as the Dow lost 0.3%, the S&P 500 fell 1.9% and the tech-heavy Nasdaq tumbled 4.5%. The bearishness continued throughout most of Monday’s trading session.
The most cited “cause” for last week’s decline and extreme rotation was the continued rise in the 10-year Treasury yield. In early December the 10-Year was trading at 1.34%, and by the end of last week, it was hovering above 1.75%.
As you can see below, even though energy and financials performed incredibly well during the first week of trading, growth areas like technology and communication services, among a few other areas that led the bullish charge in 2021, faltered mightily.
This week I’m adding an energy stock engaged in hydrocarbon exploration.
The Stock – Marathon Oil (MRO)
Why the Strength
Small- and mid-sized energy names have actually been just so-so performers of late, but Marathon Oil is an exception, and it should be—it’s probably our favorite story outside big-cap energy space because it has all the metrics that should keep investors clicking the buy button.
The company operates in four different basins, with the Eagle Ford and Bakken making up most production (SCOOP, the Permian and even an operation in Guinea make up the rest), and like its peers, Marathon has been busy cutting costs, reducing debt (down $1.4 billion in the first nine months of the year; $50 million of annual interest savings; net debt is now less than 1.5x cash flow) and holding production relatively steady (max 5% production growth planned).
And now the company is set to return a slew of cash to shareholders—even at $60 oil and $3 natural gas, the firm should earn about $1.5 billion of free cash flow in 2022 (more than 10% of the market cap!) and return something like $1.1 billion of that through dividends (the regular dividend yields 1.0%, but special dividends are possible) and share buybacks (targeted $500 million in Q4 alone, with more coming).
And this should be just the tip of the iceberg, with similar returns to shareholders likely all the way out to 2025 at $60 oil—never mind $75 or $80 oil like we’re seeing today.
All in all, it’s a very solid story that looks undervalued even if energy prices come down a good amount.
MRO rallied to 13.3 in early March of last year, and after that it had two tough corrections (both 27% deep), a strong rally in September and October but then a third pullback (this one 19% deep) that nearly brought it back to that March peak—all told, about nine months of no net progress.
But now MRO is back in gear, rallying to new highs with the group on good (though not amazing) volume. Stop—15.40
The Covered Call Trade
Buy Marathon Oil (MRO) Stock at 18.00, Sell to Open February 18 Strike Calls (exp. 2/18) for $0.90, or a Net Price of 17.10 or less
Static Return: $90 per covered call (5.23%)
Covered Call Return (if assigned): $90 per covered call (5.23%)
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 17.10 or less. (In this case 18 minus 0.90 = 17.10. Or another example is you could pay 17.50 for the stock and sell the call for 0.40, which also equals 17.10.)
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 …
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||21.50||19.5||January 22 - $0.65||$0.45|
|Pure Storage (PSTG)||33.15||30.00||26.5||January 33 -- $2.25||$0.15|
|Ciena (CIEN)||74.20||74.50||64.0||January 75 -- $2.50||$1.50|
|Alcoa (AA)||55.25||59.50||44.5||January 55 -- $4.25||$5.50|
|Jabil (JBL)||71.00||69.20||62.5||February 70 -- $3.20||$2.50|
The next Cabot Profit Booster issue will be published on January 18, 2022.
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