Before we dive into this week’s idea, we do need to move on from our United Airlines (UAL) covered call as the stock has broken our stop.
To execute this trade you need to:
Sell UAL Stock
Buy to Close the September 52 Call for $0.02 (approximately)
Partially aided by declines in mega-cap technology stocks Apple (AAPL) and Nvidia (NVDA), both of which lost 6% last week, the holiday-shortened week was not particularly kind to the bulls as the S&P 500 fell 1.3%, the Dow lost 0.75%, and the Nasdaq declined by 2%.
The Stock – PBF Energy (PBF)
Why the Strength
With crude oil prices on the rise, it’s no surprise the energy sector continues to produce a bunch of strong performers. One of the more attractive ones right now is PBF Energy, which is one of the largest independent petroleum refiners, and then there’s the company’s Logistics segment, which includes owning, leasing and the acquisition of terminals, pipelines and storage facilities.
Earlier this year, PBF entered a 50/50 joint venture with global integrated energy giant ENI for a biorefinery in Louisiana—the St. Bernard Renewables (SRB) biorefinery—which will produce hydrotreated vegetable oil (renewable diesel) with a production capacity of over 300 million gallons per year. SRB started commercial production in June and sold its first products in July, and ENI has committed to providing capital contributions of $846 million to PBF for the project, paid in Q2 and Q3 of this year.
In the latest quarter (ended June 30), PBF posted revenue of $9.2 billion that was 35% lower year-on-year and earnings of $2.29 a share that beat estimates by a dime, led by strength in the Refining segment. Thanks in part to SRB, the firm said it was on pace for its second-best financial year ever and that for the first time in its history, it now owns and controls all its inventory, which management called a “milestone event.”
Looking ahead, PBF expects a “tight” balance between global refining capacity and refined product demand. Earnings are still backtracking after a ridiculous upmove in 2022, but they’re fading less than expected, which means the stock looks cheap even when looking at 2024 numbers. A 1.5% dividend yield ties the bow on this attractive package.
Technical Analysis
PBF hit a multi-year high at 48 last November and then spent the next eight months bobbing and weaving in a loose, lateral trading range. Shares started tightening up in June and burst out of the gate in July as crude oil prices took off. Last week’s breakout came on solid volume and was preceded by a reasonable rest just short of the prior high near 50. Stop — 46
The Covered Call Trade
Buy PBF Energy (PBF) Stock at 54, Sell to Open October 55 Strike Calls (exp. 10/20) for $2, or a Net Price of 52 or less
Static Return: $200 per covered call (3.84%)
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 54 minus 2 = 52. Or another example is you could pay 53.8 for the stock and sell the call for 1.80, 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 September 19, 2023.
