March 8, 2022

For the past several weeks, we have bought oils and commodity stocks. Today, I’m going to diversify our portfolio a bit, adding American semiconductor supplier, Onsemi (ON).

Market Overview

It was another volatile week for the market with the bears, once again, taking control.

The Dow and S&P 500 lost 1.3% and the tech-heavy Nasdaq fell 2.4%. Year-to-date the Dow, S&P 500 and Nasdaq are lower by 7.5%, 9.2% and 14.9%, respectively. And the trading action yesterday continued to be weak as the S&P 500 fell another 2.95%.

At the moment, there isn’t much value to add regarding the market’s current state, as escalating geopolitical fears have a stranglehold on the leading indexes and stocks. At some point the market will move past this story, but in reality, we are only in week two of this unfortunate war.

For the past several weeks, we have bought oils and commodity stocks. Today, I’m going to diversify our portfolio a bit, adding American semiconductor supplier, Onsemi (ON).

New Recommendation

The Stock – Onsemi (ON)
Why the Strength
Onsemi is doing well as it continues to shift out of the commodity-like, low end of the market with a focus on larger, more sophisticated wafers geared for the renewable energy and automotive industries.

The company, long known as On Semiconductor, just announced a deal to sell its South Portland, Maine fabrication plant, right after closing on the sale of another in Belgium. The goal is to lower its costs by trimming out plants focused on producing the cheaper, lower margin, more price-volatile wafers that have made it a boom-bust type stock in the past.

The freed-up capital is being used to build capacity for premium millimeter wafers, with an expansion underway at its East Fishkill, New York, facility.

Part of the strategy to being less of a commodity producer is to emphasize silicon carbide-based chips (SiC), which are more heat-tolerant and efficient than traditional silicon. That makes SiC better for higher-growth renewable and electrification responsibilities, where electricity throughput is higher. In a move to help that along, Onsemi closed a $415 million purchase of GT Advanced Technologies late last year, which produces high quality silicon carbide crystals for the industry. That secures Onsemi the SiC needed for expansion, and gives it greater ability to sell excess to other fabricators. That should support a 50% spike in the firm’s renewable energy business, which will contribute to an overall 28% sales gain management sees for 2022, with current Q1 revenue seen hitting $1.9 billion and with analysts anticipating the bottom line to catapult north of 40% this year.

Technical Analysis
ON has enjoyed three straight quarters of earnings beats, gapping shares higher each time. The latest, in February, was the least dramatic, but it’s at least helped the stock remain resilient—shares fell sharply from 71 at the start of the year to 51 at the market’s low in January, but bounced back to 67 after earnings and are still hanging around the mid-50s even as the market sniffs new correction lows. Stop - 48 (please note this stop level is a couple dollars below Mike’s stop as the large call premium will give us room to the downside)

The Covered Call Trade
Buy Onsemi (ON) Stock at 54, Sell to Open April 55 Strike Calls (exp. 4/14) for $3.70 or a Net Price of 50.30 or less

Static Return: $370 per covered call (7.36%)

Breakeven: 50.30

Covered Call Return (if assigned): $470 per covered call (9.34%)

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 50.30 or less. (In this case 54 minus 3.70 = 50.30. Or another example is you could pay 55 for the stock and sell the 55 call for 4.70, which also equals 50.30.)

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 15, 2022.