Welcome to Oaktree Investment Advisors' Covered Call Focus blog, a place for information and education about the strategy of covered call writing in combination with business cycle analysis as a
means to reduce risk and increase income in a diversified portfolio. This strategy will be used to select target investments that will be identified and discussed weekly.
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Celanese Corp (CE) is a global technology and special materials company specializing in the chemical manufacturing of acetyl products and high performance polymers. Celanese is the leading producer of acetyl compounds, a class of compound that is a widely used immediate reagent for manufacturing across a wide variety of industries. One of these compounds, vinyl acetate monomer (VAM), is used in the production of polyvinyl acetate, a type of thermoplastic that is used in thousands of products mainly as an adhesive. Celanese's 7,600 employees produce integral chemical compounds such as this for applications and manufacturing around the world.
Celanese Corp has a market capitalization of $9.60 billion with 156.9 million outstanding shares.
Celanese currently pays a $0.25 quarterly dividend, for a current yield of 1.6%.
With a beta of 1.15, CE currently trades with approximately 15% greater volatility than the current market.
According to Investor's Business Daily, the market is currently in a correction phase. This is mainly due to the volume, magnitude, and manner of distribution days the market has seen over the past several weeks. This may come as a shock to many who have been looking at the, albeit choppy and volatile, market that keeps testing new highs. But the stats do not lie, and when momentum peters out it usually means a downtrend will follow. That said, it might be interesting we are recommending Celanese. The company is in a cyclical industry (with chemicals being linked to manufacturing, which is closely tied to movements in the business cycle) and has a beta greater than one, showing greater volatility than the broader market. Conventional knowledge would be to invest in safer stocks with low beta and less cyclicality, and that is not a wrong assessment. But during choppy market conditions like this where we are "technically" in a correction, but the market signals are less than clear, using Covered Call Strategies is a great way to invest in the market while reducing your risk.
While considerably more risky than a stock like JNJ or PG, Celanese does have quite a few things going for it. The company recently reported Q1 2014 results last month with adjusted EPS up 16.7% y/y, profit from continuing operations up 42% y/y, and sales up 6.2% y/y - all results beating street expectations. The company also just recently raised its dividend by 39%, demonstrating a commitment to return value to shareholders from the strong cash flow generated by the company. The company trades at a P/E of 13, a discount to the S&P 500's P/E of 18.77 and in the lower half of the company's 5-Year P/E Range. With an expected 2014 earnings increase of 13% and a ROE of 32%, the company's stock presents an attractive investment. This has translated to an Accumulation/Distribution Rating of 'A', with an Up/Down Ratio of 1.9, showing strong investor support for the stock - a good quality to have in an investment when currently in a market correction.
One of the big reasons to invest in CE though is because of the natural gas industry here in the United States. A large number of chemicals and reagents used in manufacturing start out as natural gas and oil. Plastics, adhesives, paints, and a million other products all are created from the hydrocarbon compounds we know as natural gas and oil. It stands to reason then, if we are seeing a glut of natural gas and oil, these beginning materials are relatively cheap in comparison to past levels, allowing chemical companies like CE to churn out their products with greater cost efficiency. If you believe in the growth of the domestic energy scene based off of the wealth of natural gas we have, then investing in chemical companies like CE is a good way to capture some of that growth.
For a Covered Call strategy on CE, we are recommending a Call that is slightly in-the-money. While CE has great estimates for the future, and is technically is a strong buy position with just breaking out through a resistance level, we can not overlook the fact that the market as a whole is considered to be in a correction. By selling an at-the-money or in-the-money Call, we are able to better control the risk we have in our investment by lowering our cost basis through a greater premium. If the market corrects as we expect, we will hold on to a stock that we got to back into it a nice price. If the market holds or CE bucks the greater trend, then we have picked up a nice yield for our money while not having to worry about the risk in our portfolio. That is why we are recommending buying CE and selling the September 2014 $60 in-the-money Call.
Buy 100 shares of CE @ $60.97 = $6,097 + Commission ($12.95) = $6,109.95
Write 1 CE September 2014 $60 Call @ $340 - Commission ($8.70) = $331.30
Note: Prices may vary from the time of post. Actual commissions paid will vary returns.
Static Return (Not Called):
(Call + Dividends)/Stock Price X (Days/Year)/Days to Expiration
(3.31 + 0.25)/61.10 X (365)/138
= 15.41% Static Return
(Call + Dividends + Strike Price - Stock Price)/Stock Price X (Days/Year)/Days to Expiration
(3.31 + 0.25 + 60 - 61.10)/61.10 X (365)/138
= 10.65% If-Called Return
Disclosure: Clients and/or principles of OakTree Investment Advisors may or will have an investment in the above positions, but only on the the same sides of the trades. The above numbers are analytic estimations based on information known at the time of this post. OakTree Investment Advisors does not guarantee the above, or any, result. All investment decisions should be made based upon individual’s personal investment goals and risk tolerance.