This strategy not only provides one with the chance to leverage one's position in ArcelorMittal (NYSE:MT) but it always provides one with the chance to get into the stock at a much lower price. This technique should only be employed if you are bullish on the stock. If you are not bullish on the long term prospects of this stock, then you would be better served by looking for other plays.
Some reasons to be bullish on ArcelorMittal:
- A decent yield of 4.40%
- A levered free cash flow of $1.00 billion
- A Retention rate of 66%
- A free cash flow yield of 8.9%
- A long term debt to equity ratio of 0.44
- Projected year over year growth rates of 8.43% and 53.7% for 2012 and 2013 respectively
- Sales increased from $65 billion in 2009 to $93.9 billion in 2011.
- Net income surged from $75 million in 2009 to a stunning $2.25 billion in 2011.
- EBITDA increased from $1.02 billion in 2009 to $9.2 billion in 2011.
- Cash flow per share increased from $4.88 in 2009 to $5.04 in 2011.
- A high beta of 2.54 which makes it a good candidate for covered writes. Selling covered calls open up a second stream of income. If one is bullish on the stock, then the high beta is also good for selling naked puts.
- It has an estimated 3-5 year EPS projected growth rate of 21%.
- $100K invested for 10 years would have grown to $918K.
Suggested strategy for ArcelorMittal:
It appears to be putting in a bottom as after trading down to 13.62 in May it has been putting in higher lows. A weekly close above 17.50 on good volume will be a bullish development.
The Jan 2013, 14 puts are trading in the 1.75- 1.792 ranges. Sell these puts for 1.75 or higher. For each contract sold $175 will be deposited into your account.
The Jan 2013 calls (highlighted in yellow) are trading in the $0.55-$0.59 ranges. Purchase these calls at 58 cents or better. For each put sold you will be able to purchase up to 3 calls.
Benefits of this strategy
You have the chance to significantly leverage your position with no out of pocket cost. In addition if the stock trades below the strike price, you sold the puts at you have a chance of getting into this play at a much lower price. Depending on how many calls you purchased your final price will range from $12.83 if you purchased one call to $14.00, if you purchased three calls.
The risk is that the shares could be assigned to your account if the stock trades below the strike you sold the puts. However, as you were bullish when you initiated the play this should not be big issue. If you do have change of heart and feel that the stock could trade lower, you can just roll the puts. Buy the existing ones back and sell new puts that are slightly out of the money.
- Free cash flow yield = 8.9%
- Relative Strength 52 weeks = 17
- Dividend 5-year Growth = -12.59
- Cash Flow 5 -year Average = 9.31
- Long term debt to equity = 0.44
- Beta = 2.54
- Quarterly revenue growth =2.3%
- Short ratio = 2.8%
- Quarterly earnings growth = -99%
- Levered Free Cash Flow = $1.00 Billion
- Net Income ($mil) 12/2011 = 2259
- Net Income ($mil) 12/2010 = 3005
- Net Income ($mil) 12/2009 = 75
- EBITDA ($mil) 12/2011 = 9294
- EBITDA ($mil) 12/2010 = 7829
- EBITDA ($mil) 12/2009 = 1020
- Cash Flow ($/share) 12/2011 = 5.04
- Cash Flow ($/share) 12/2010 = 4.64
- Cash Flow ($/share) 12/2009 = 4.88
- Sales ($mil) 12/2011 = 93973
- Sales ($mil) 12/2010 = 78025
- Sales ($mil) 12/2009 = 65110
- Annual EPS before NRI 12/2009 = 1.5
- Annual EPS before NRI 12/2010 = 1.68
- Annual EPS before NRI 12/2011 = 1.8
- Dividend Yield = 4.4
- Dividend Yield 5 Year Average = 2.70
- Dividend 5 year Growth = - 6.97
Only investors that bullish on the stock should put this strategy into play, as there is a chance that the shares could be assigned to your account if the stock trades below the strike price. This usually takes place on the expiration day as most option players are in the game to make money and not to force the seller of the option to purchase the shares. Investors looking for other ideas might find this article to be of interest: Wells Fargo: In At $27.05 Or Get Paid 9.8% In 7 Months.
Sources: EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Options tables sourced from money.msn.com. Earnings and growth estimates sourced from dailyfinance.com.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. We might sell puts over the next 3-5 days.
Disclaimer: It is imperative that you do your due diligence and then determine if the above strategy meets with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware