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156% in COSTCO WINNINGS!… Then Take a Ride on The Big Steel Rail (NUE, COST)

Posted on January 13, 2022

We’re going to jimmy up the locomotive and screech our way to some steel-industry profits, with a piggy-back on the NUCOR track (NYSE:NUE).

You Guys are Flippin’ Poets!

But before we get there, we’ve got one trade to close for a very large take.

It’s our COST initiative, whose details can be found HERE.

In brief, we’re holding the March 18th 540 synthetic short and have a debit of $1.75.

And…

And today, the numbers are as follows – the CALL goes for $14.75 and the PUT for $27.90.  Buy back the first, and sell off the second and you gross $11.40 on just $4.45 spent.

And that’s an extraordinary 156%.

Woo-hoo!

Now for this week’s bet.

We’ve got an extraordinarily inexpensive creation for you today – that pays a bundle if we’re right.

As mentioned, steel manufacturer NUE is in our spotlight – and not for the good.

Have a look at some fundamentals – most of which look fine.

  • P/E is 6.80,
  • Dividend Yield is 1.74%, and
  • Price to Book is 2.48.
  • And yet, last (full) year’s earnings were DOWN by 42.90%, and
  • Next (full) year’s earnings are expected to decline by ANOTHER 28.43%.

How do you like that…?

NUCOR is expected to release earnings on June 27th.

And we don’t think the results will be impressive.

The past year saw a recovery in both price and demand for steel, but supply is returning like a drunken wildebeest, and imported (cheaper) steel has been flooding the U.S. market – despite existing tariffs.

A stalled infrastructure bill also doesn’t help.

Now look at the chart –

Some significant technical markers here –

  1. First, we have a nine month Head and Shoulders pattern that appears to be headed toward completion (in red).
  2. The right shoulder peak looks to have been formed last week (enlarged, in blue), with a bearish engulfing pattern.  That very likely signals a top for the stock, and a move lower – according to a basic neckline count – could bring NUE as low as 52.
  3. RSI and MACD are showing a massive loss of buying momentum since RSI went overbought – concurrent with the H&S pattern that began in MAY (at bottom, in red & green).  All of which points to a significant break approaching.

Our trade demands a modest decline – and pays lavishly for a retreat just to the H&S neckline.

And it looks like this –

A Jew and His Gold recommends you consider selling the NUE April 14th 110/115 CALL spread* for a credit of $2.35 (11.70/9.35) and buying the NUE April 14th 110/105 PUT spread** for $2.30 (7.55/5.25).  Total credit is $0.05.

[*Sell the 110 CALL and buy the 115 CALL.  **Buy the 110 PUT and sell the 105 PUT.]

Rationale: we pay nothing for an opportunity to rake in $5.05.

Adjusted for minimal commissions gives us a return of 3267%.

Not bad, eh?

Full payout arrives if NUE closes below 105 at expiry.  That constitutes a retreat of just 8.4% from current price levels.  And that also represents a tremendous opportunity, we reckon.

Max loss is $4.95 (difference between the CALL strikes less the initial credit).

It’s quite likely the trade won’t last until expiry.  Any decline toward our neckline target will offer sufficient reason to close.

And the Holy One Blessed Be He is watching it all.

Many happy returns!

Matt McAbby

 

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