Market Overview
Ahead of the “big” Federal Reserve announcement on Wednesday, the market surged higher last week. The S&P 500 gained 4%, the Dow rose 5.7%, and the Nasdaq rallied 2%.
This week will likely go a long way to determining if this is yet another bear market rally that will soon fail, or the start of a sustained year-end advance. As always, it will be interesting!
The Stock – Global Foundries (GFS)
Why the Strength
The explosive growth in electric vehicle (EV) demand is a huge potential driver for the semiconductor industry, as EVs require far more chips than traditional cars. This point was emphasized at a recent investor day presentation by GlobalFoundries (GFS), which is a major provider of the chips and nodes used in EVs.
GFS is one of the world’s leading semiconductor contract manufacturers, providing a mix of design, development and fabrication services for several high-growth markets (including mobile devices, personal computers and data centers). The company said the recently passed CHIPS Act will bolster domestic semiconductor production, which it says will enable the company to reach its goal of increasing annual revenue growth to around 10% while drastically increasing gross margin. On that score, GFS just received $30 million in federal funding to advance the development and production of next-generation gallium nitride (GaN) chips at its Vermont plant. This a key reason for the latest strength, as the global chip shortage has caused more companies to turn to GaN semiconductors, which are easier and faster to produce than silicon chips and are able to handle significantly higher heat and power levels.
Also attractive is the firm’s huge collection of long-term orders—it has big expansion plans, and those are backed by multi-year deals with many top clients, with a company backlog north of $24 billion (up from $20 billion last August; 75% of its 2024 planned capacity is covered by these deals). On the financial front, the company beat revenue expectations in Q2 with sales of $2 billion that grew 23% from a year ago, while per-share earnings of 58 cents beat estimates by 13 cents and Wall Street expects the strong top- and bottom-line growth will continue when Q3 is reported on November 8 (next Tuesday).
Technical Analysis
GFS came public in October 2021 at 47 and has been up and down since then, but it’s finally making a go at a proper, more controlled launching pad—after rallying six weeks in a row into August (a clue of persistent buying), shares pulled back for nine weeks on light volume and are beginning to perk up as investors await Q3 results. Stop - 50
The Covered Call Trade
Buy Global Foundries (GFS) Stock at 58, Sell to Open December 55 Strike Calls (exp. 12/16) for $6, or a Net Price of 52 or less
Static Return: $300 per covered call (5.76%)
Breakeven: 52
Covered Call Return (if assigned): $300 per covered call (5.76%)
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 52 or less. (In this case 58 minus 6 = 52. Or another example is you could pay 57.75 for the stock and sell the call for 5.75, which also equals 52)
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 November 8, 2022.
