Inflation was the focus last week with the release of the much-anticipated producer price index (PPI) and the consumer price index (CPI). Both came in well above expectations. CPI came in at 6.2%, which was the highest level seen in over 30 years, while the PPI was 8.6%, the highest in more than 10 years. These data points flamed the inflation fears that many had been anticipating for the past several months.
And while inflation is going to continue to be a worry for the bulls, as of last Friday, 460 of the companies that reside in the S&P 500 have reported earnings, with 80% outperforming expectations, a number which has far outperformed analyst expectations.
Speaking of strong earnings, this brings to me to this week’s idea which is a global leader in the tire market, and which just reported a strong third-quarter earnings report.
Market Overview
Before we dive into the market, and this week’s idea, a bit of “house cleaning” …
First off, due to our regular schedule (two weeks off a year), there will be no Cabot Profit Booster next Tuesday (November 23). Have a Happy Thanksgiving!
Next up, we will receive the $0.06 a share dividend via our Marathon Oil (MRO) covered call in the coming weeks. Even though our covered call will expire on Friday, because we own the stock today, we will receive the dividend.
Also of note, this week is the expiration of our November covered calls. I would expect IGT, BLDR, and DDOG will all expire for full profits on Friday, while MRO is bouncing above and below our short strike price. Regardless of the MRO outcome, it’s been a great month.
Moving on …
After five straight weeks of gains, the market finally took a breather last week. The S&P 500 dipped 0.3%, the Dow fell 0.6%, and the Nasdaq lost 0.7%.
Inflation was the focus last week with the release of the much-anticipated producer price index (PPI) and the consumer price index (CPI). Both came in well above expectations. CPI came in at 6.2%, which was the highest level seen in over 30 years, while the PPI was 8.6%, the highest in more than 10 years. These data points flamed the inflation fears that many had been anticipating for the past several months.
And while inflation is going to continue to be a worry for the bulls, as of last Friday, 460 of the companies that reside in the S&P 500 have reported earnings, with 80% outperforming expectations, a number which has far outperformed analyst expectations.
Speaking of strong earnings, this brings to me to this week’s idea which is a global leader in the tire market, and which just reported a strong third-quarter earnings report.
New Recommendation
The Stock – Goodyear Tire & Rubber (GT)
Why the Strength
Goodyear Tire was able to sidestep higher rubber prices, supply-chain challenges and lower automobile production (due to the chip shortage) in Q3, turning in a stellar performance.
Goodyear’s third-quarter sales of nearly $5 billion were 42% higher than a year ago, driven partly by the company’s recent acquisition of Cooper Tire, but also due to strong organic sales in its legacy business (even without Cooper, sales still rose 16%).
Per-share earnings of 72 cents per were 44 cents above estimates and well above even pre-pandemic levels, despite a 15% increase in raw materials costs in the quarter. And even though original equipment shipments were down (mainly in Europe and China), Goodyear saw a 10% increase in revenue per tire—the most in nearly a decade!
By region, sales in the Americas were up 63%, Europe, Middle East and Africa sales increased 21% and Asia Pacific sales rose 17%. Volumes, moreover, returned to pre-pandemic levels in Goodyear’s core replacement tire business. Additionally, Goodyear’s Fleet segment continued to perform well, with fleet tire volume increasing more than 10% from the year-ago quarter.
Management also raised its estimates of Cooper deal-related savings by 50%, from $165 million to $250 million by 2023, and the company expects to realize approximately $20 million of those savings this year. There’s nothing revolutionary here, but the Cooper acquisition was a big plus, and higher auto production as the chip shortage eases should only help—analysts see earnings surging 44% next year.
Technical Analysis
GT hit a rough patch this summer, falling from 20.5 in June before bottoming at 14.5 in August. The action after that was impressive, including a string of eight weeks up in a row (an early clue that better things were ahead), and the big-volume, earnings-induced move two weeks ago looks decisive. Stop — 19.5
The Covered Call Trade
Buy Goodyear Tire (GT) Stock at 23, Sell to Open December 23 Strike Calls (exp. 12/17) for $1.10, or a Net Price of 21.90 or less
Static Return: $110 per covered call (5.02%)
Breakeven: 21.90
Covered Call Return (if assigned): $110 per covered call (5.02%)
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 21.90 or less. (In this case 23 minus 1.10 = 21.90. Or another example is you could pay 23.2 for the stock and sell the call for 1.30, which also equals 21.9)
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 |
| International Game Technology (IGT) | 28.10 | 30.00 | 22.5 | November 26 -- $3.50 | $4.00 |
| Builders FirstSource (BLDR) | 55.50 | 67.00 | 49.0 | November 55 -- $3.40 | $12.00 |
| Datadog (DDOG) | 157.60 | 190.00 | 135.0 | November 152.5 -- $12.50 | $37.50 |
| Marathon Oil (MRO) | 16.87 | 16.75 | 14.2 | November 16.5 -- $1.01 | $0.40 |
| Marvell Technology (MRVL) | 69.50 | 73.00 | 60.0 | December 70 -- $3.40 | $5.00 |
| Zoom Info (ZI) | 74.00 | 75.00 | 63.0 | December 75 -- $4.00 | $4.00 |
The next Cabot Profit Booster issue will be published on November 30, 2021.
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