Ahead of the long holiday weekend, it was a mixed bag last week as the S&P 500 rose 0.58%, the Dow lost 0.25%, and the Nasdaq climbed 1.55%.
This week traders will keep a close eye on inflation as the Labor Department releases its August index of U.S. wholesale prices, otherwise known as the producer price index. The market is estimating an increase of 0.5%, after 1% increases in June and July. July witnessed a 7.8% increase year over year, which was the largest bump in over a decade. Another spike would not bode well for the overall market, so I will be keeping an eye on the release and its impact on price action.
With that in mind, and always an eye on diversification, this week’s pick is a steel and iron enterprise company.
Cabot Profit Booster 191
Ahead of the long holiday weekend, it was a mixed bag last week as the S&P 500 rose 0.58%, the Dow lost 0.25%, and the Nasdaq climbed 1.55%.
This week traders will keep a close eye on inflation as the Labor Department releases its August index of U.S. wholesale prices, otherwise known as the producer price index. The market is estimating an increase of 0.5%, after 1% increases in June and July. July witnessed a 7.8% increase year over year, which was the largest bump in over a decade. Another spike would not bode well for the overall market, so I will be keeping an eye on the release and its impact on price action.
With that in mind, and always an eye on diversification, this week’s pick is a steel and iron enterprise company.
The Stock – Ternium S.A. (TX)
Why the Strength
Thanks to this year’s revival of the global economy, 2021 has been stellar for industrial metal producers like Ternium.
The company manufactures a wide range of high-quality steel products for housing and infrastructure works, with fully-integrated production centers throughout Latin America and the U.S. Elevated global steel demand, low inventories and strong pricing contributed to record quarterly sales, margins and EBITDA for Ternium in Q2, along with “significant” free cash flow.
The results were partly driven by a successful ramp-up of a hot rolling mill in Mexico (the company’s main steel market) in the quarter. Management expects the new facility will enable Ternium to increase its market offering of high-quality steel products by around 600,000 tons over the remainder of the year (a 50% increase). Consensus-beating revenue of $3.9 billion in Q2 more than doubled from a year ago (partly attributable to easy comparisons), while per-share earnings of $5.21 beat estimates by $1.74, driven by a 25% increase in steel shipments.
Though Ternium expects lower steel prices in the second half of 2021, it also sees steel production limits in China (due to environmental regulations) and taxes on Russia’s steel exports contributing to a continued strong global market environment for the metal going forward.
The company also has high hopes for its new mill in Mexico, believing it will drive growth in the second half due to high demand for HVAC-related products, electrical motors and household appliances, as well as a strong auto market.
Analysts see earnings mushrooming to $16 per share this year (P/E of 5!), and even after some retrenchment, coming in at $10 in 2022.
Technical Analysis
TX has had a great run during the past year, and shares have enjoyed a nice run in recent weeks even as many peers are still in the neighborhood of their May/June highs.
Indeed, TX motored higher eight weeks in a row to decisive new highs in July and August, and a three-week rest has allowed the 25-day line to catch up. Expect volatility, but we’re OK grabbing shares here. Stop—46.50
The Covered Call Trade
Buy Ternium S.A. (TX) Stock at 53.30, Sell to Open October 55 Strike Calls (exp. 10/15) for $1.90, or a Net Price of 51.40 or less
Static Return: $190 per covered call (3.70%)
Breakeven: 51.40
Covered Call Return (if assigned): $340 per covered call (7.00%)
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 51.40 or less. (In this case 53.30 minus 1.90 = 51.40. Or another example is you could pay 54 for the stock and sell the call for 2.60, which also equals 51.40.)
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 |
| Dynatrace (DT) | 64.70 | 70.00 | 55.0 | September 65 -- $3.20 | $5.00 |
| ON Semiconductor (ON) | 44.60 | 45.50 | 40.0 | September 46 -- $1.40 | $0.80 |
| Colfax (CFX) | 48.35 | 47.50 | 44.5 | September 50 -- $1.00 | $0.15 |
| Builders FirstSource (BLDR) | 50.60 | 54.00 | 44.0 | September 50 -- $2.20 | $4.00 |
| Sonos (SONO) | 39.35 | 39.00 | 34.0 | October 40 -- $2.10 | $1.50 |
The next Cabot Profit Booster issue will be published on September 14, 2021.
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