July 5, 2023

Market Overview
Ahead of the long holiday weekend the market had yet another good week. The S&P 500 gained 1.75%, the Dow rallied 1.5%, and the Nasdaq rose another 1.9%.

This week in an attempt to diversify the portfolio we are adding an energy play.

The Stock – TechnipFMC (FTI)

Why the Strength 

Remotely operated vehicles (ROVs) are making worldwide headlines in the wake of the disaster involving the OceanGate submersible (which was just located and recovered using an ROV). The news also underscores how the technology is being used to explore ocean depths for oil and gas deposits, as well as in other subsea applications—such as repairing underwater equipment—thus allowing companies to reach depths not possible with divers. U.K.-based TechnipFMC is a global leader in traditional and renewable energy solutions, providing design, engineering and manufacturing of the systems used to access energy resources on land and at sea—including what are regarded as the world’s most advanced ROVs, manipulator arms and exploration subs. In Q1, the company reported “robust” inbound orders for both its subsea and surface technology segments; while per-share earnings were a penny, up from a tiny loss last year, revenue of $1.7 billion grew 10% in the quarter and adjusted EBITDA grew 3%, driven by “solid” operational performance—all of this occurring while the offshore drilling market segment remains sluggish. The company garnered $2.5 billion in subsea orders which, along with integrated Engineering, Procurement, Construction, and Installation (iEPCI), accounted for 70% of its orders. However, this is really about what comes next: FTI’s backlog increased 19% (up 13% sequentially) to $11 billion, and management said it’s “confident” given the “high quality opportunities” the firm is pursuing that Q1 likely wasn’t the quarterly peak for this year’s iEPCI orders; it also expects record subsea orders of more than $8 billion this year (around $2 billion of which has been contracted in just the last six weeks!). And all of that means the bottom line is headed up—Wall Street sees earnings near 50 cents per share this year and over a dollar next, and both are probably conservative.

Technical Analysis 

Oil stocks have been laggards for months, so when FTI showed up on our Top Ten screens, it certainly caught our eye. The stock acted well into the end of February before correcting in March with the market/banking crisis, falling quickly from 16 to 12—but that was the low, with a couple of higher bottoms in early May and June before FTI perked up. And now, after some tightness, shares have showed real strength, surging to new price highs. We’re intrigued—we’re OK snagging a few shares around here with a stop in the mid-14s. Stop — 14.4

The Covered Call Trade
Buy TechnipFMC (FTI) Stock at 17, Sell to Open August 17 Strike Calls (exp. 8/18) for $0.75, or a Net Price of 16.25 or less

Static Return: $75 per covered call (4.61%)

Breakeven: 16.25

Covered Call Return (if assigned): $75 per covered call (4.61%)

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 16.25 or less. (In this case 17 minus 0.75 = 16.25. Or another example is you could pay 16.60 for the stock and sell the call for 0.35, which also equals 16.25)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 July 10, 2023.