Fueled by better-than-expected earnings last week the S&P 500 rose 1.6%, the Dow climbed 1.1%, and the Nasdaq added 1.3%.
Despite the strong week, on Friday traders’ enthusiasm for the recent rally faded a bit after Fed Chairman Jerome Powell’s commented that the central bank was “on track” to begin reducing its purchases of assets.
However, Monday the bulls stepped right back in and once again “bought the dip.”
This week brings earnings announcements from key mega-cap tech names Amazon (AMZN), Facebook (FB), Alphabet (GOOG), and Apple (AAPL). There is also a bevy of blue chips reporting including United Parcel Service (UPS), Visa (V), McDonald’s (MCD), Coca-Cola (KO), Boeing (BA), Merck (MRK), Caterpillar (CAT) and numerous others. Brace yourself, it’s going to be exciting!
Energy has taken off lately and I want to add exposure to the sector. However, I still want to maintain a somewhat conservative stance, especially as this week’s pick will report earnings next week. As a result, I will be selling in-the-money calls on hydrocarbon explorer Marathon Oil (MRO).
Cabot Profit Booster 198
Fueled by better-than-expected earnings last week the S&P 500 rose 1.6%, the Dow climbed 1.1%, and the Nasdaq added 1.3%.
Despite the strong week, on Friday traders’ enthusiasm for the recent rally faded a bit after Fed Chairman Jerome Powell’s commented that the central bank was “on track” to begin reducing its purchases of assets.
However, Monday the bulls stepped right back in and once again “bought the dip.”
This week brings earnings announcements from key mega-cap tech names Amazon (AMZN), Facebook (FB), Alphabet (GOOG), and Apple (AAPL). There is also a bevy of blue chips reporting including United Parcel Service (UPS), Visa (V), McDonald’s (MCD), Coca-Cola (KO), Boeing (BA), Merck (MRK), Caterpillar (CAT) and numerous others. Brace yourself, it’s going to be exciting!
Energy has taken off lately and I want to add exposure to the sector. However, I still want to maintain a somewhat conservative stance, especially as this week’s pick will report earnings next week. As a result, I will be selling in-the-money calls on hydrocarbon explorer Marathon Oil (MRO).
The Stock – Marathon Oil (MRO)
Why the Strength
Marathon Oil is a relatively small player in the U.S. oil story, but it’s shown up in Top Ten a couple of times this year as its cash flow profile is as good as any of its peers.
The firm has operations in a handful of the top basins in the U.S., including the Delaware, Eagle Ford, Stack/Scoop and the Bakken, and it also has a small-ish thing going on in Guinea, but the focus is now on efficient production, not on growth; indeed, the firm expects production growth of less than 5% annually in the years ahead.
But management is content with keeping CapEx in check (about $1 billion this year; breakeven oil price below $35 oil), which is leading to truly jaw-dropping amounts of cash flow—for 2021, the top brass thinks it will earn $1.9 billion of free cash flow (nearly 15% of the market cap), and that’s assuming just $65 oil and $3 natural gas!
And there’s a lot more where that came from, with management believing it can crank out $1.6 billion of free cash flow annually through 2025 at just $60 oil! For now, most of that cash is going to debt reduction—$1.4 billion of debt has been slashed so far this year—but it’s close to meeting its goals on that front, which should leave a ton to return to shareholders in the quarters ahead:
As of Q2, it said it aims to return $1 billion or so in 2022 assuming oil is at $60 or above, and that could come via dividends (the base dividend yields 1.2% but could be hiked significantly) or share buybacks (current repurchase authorization is nearly 10% of the market cap!).
The next report is due November 3, and we’ll be interested to hear (a) any updated cash flow projections given current energy prices and (b) whether they start handing out wads of cash earlier than expected.
Technical Analysis
MRO peaked at 13.3 in early March and, net-net, did nothing for the next six and a half months. But now the buyers are back, with a decisive breakout and upside follow-through since then on accelerating volume (four straight big-volume buying weeks of late).
We can’t rule out a shakeout of some sort, but we’re not expecting a major retreat given the massive buying—we’re OK starting a position here or on dips. Stop—14.20
The Covered Call Trade
Buy Marathon Oil (MRO) Stock at 17, Sell to Open November 16.5 Strike Calls (exp. 11/19) for $0.90 or a Net Price of 16.10 or less
Static Return: $40 per covered call (2.48%)
Breakeven: 16.10
Covered Call Return (if assigned): $40 per covered call (2.48%)
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 16.10 or less. (In this case 17 minus 0.90 = 16.10. Or another example is you could pay 17.50 for the stock and sell the call for 1.40, which also equals 16.10.)
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 …
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 | 60.00 | 49.0 | November 55 -- $3.40 | $5.50 |
| Datadog (DDOG) | 157.60 | 162.50 | 135.0 | November 152.5 -- $12.50 | $16.00 |
The next Cabot Profit Booster issue will be published on November 2, 2021.
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