Market Overview
The start of 2023 has been a positive for the bulls as the indexes are all higher by approximately 1.5%. That being said, there are several potential market-moving events this week including Fed Chairman Jerome Powell speaking this morning and a “big” inflation report (CPI) on Thursday.
In an effort to keep the portfolio as diversified as possible, this week we are adding a precious metals play (gold/silver), though again, like last week, we are doing so with a defensive in-the-money call sale.
The Stock – Wheaton Precious Metals (WPM)
Why the Strength
Wheaton is the second precious metals stock in Top Ten this week, but neither is a miner—instead, both are streaming plays, Wheaton being one of the world’s largest, with agreements for 21 operating mines and 13 development stage projects to purchase all or a portion of their gold, silver or cobalt production for an upfront payment.
This business strategy produces big margins and allows the company to remain relatively insulated from the rising cost inflation impacting other miners. Wheaton’s main focus is on high-quality, high-margin operations with a goal of returning a minimum of 30% of cash flow to its shareholders. As was the case for most gold firms, revenue was lower for Wheaton in Q3 (down 19% from a year ago), mainly due to lower gold and silver prices, while EPS of 21 cents missed estimates by a cent; overall gold production was also lower due to the closure of one of the mines in Wheaton’s portfolio.
However, the firm used the quarter to tighten up the portfolio, announcing a proposed termination of its silver stream with Glencore on the Yauliyacu Mine in Peru for a cash payment of $150 million and it’s completing the termination of its Keno Hill stream in the Yukon for $141 million. Wheaton said it plans to put the capital back to work in growing its portfolio.
To that end, management said it sees a “very healthy appetite” for streaming as a source of capital for the mining industry and is actively pursuing a number of new deals. The company further invested a total of $47 million in the quarter to advance three key projects which it sees fueling organic growth. Wheaton also disbursed $59 million in dividends in Q3 (current yield 1.4%) and said it remains on track to generate “sustained long-term production and strong growth” over the next decade and beyond. Wall Street sees earnings bouncing a touch this year, though those estimates should rise nicely if the latest gold/silver price rally sticks.
Technical Analysis
WPM was down 42% between April and September last year during the correction in the precious metals sector. The stock rounded out a nice, smooth low area in September and October and broke higher in November on the back of gold’s recovery. Shares have established a series of higher peaks above the 25-day line in the last few weeks as WPM has launched what looks like a classic turnaround. Stop - 37
The Covered Call Trade
Buy Wheaton Precious Metals (WPM) Stock at 43, Sell to Open February 41 Strike Calls (exp. 2/17/2023) for $3, or a Net Price of 40 or less
Static Return: $100 per covered call (2.5%)
Breakeven: 40
Covered Call Return (if assigned): $100 per covered call (2.5%)
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 40 or less. (In this case 43 minus 3 = 40. Or another example is you could pay 43.1 for the stock and sell the call for 3.10, which also equals 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.
The next Cabot Profit Booster issue will be published on January 18, 2023.
