Although it doesn't make for a very interesting story, providing
replacement parts for consumers can be just as profitable as
unlocking the creative innovation that launches a new industry.
Case in point:
Cooper Tire & Rubber (
This company makes replacement tires for cars and trucks. It is
the ninth-largest tire maker in the world and markets directly to
consumers rather than supplying the parts needed for new cars
whereprofit margins can be smaller.
Tariff protection for tires was dropped in 2011, and Cooper fell
sharply when traders became concerned that cheap imports from China
could hurt the company's business. Those fears proved to be
misplaced and Cooper saw sales andearnings rise as thestock price
Despite strong financial performance, Cooper is trading with a
price-to-earnings (P/E ) ratio of about 5, less than half the
industry average and well below themarket average of about
14.Earnings per share (
) are expected to be $3.09 this year, growing to $3.14 next year,
and averaging growth of 6.5% a year for the next five years.
Cooper pays adividend of 42 cents a share, an amount that is
well-covered by earnings, for acurrent yield of 1.6%. The company
has paid a dividend for 25 consecutive years but hasn't raised the
payout since 1998. Based on the price-to-earnings (P/E) ratio,
Cooper is avalue stock , but the low dividend payout might not make
this the best pick for income investors. Covered calls can be used
to increase the income and allow income investors to enjoy a
highyield on this low P/E stock.
Withcovered call writing, you buy the stock and sell acall
option against theshares you own. If the stock goes up and is above
theoption exercise price atexpiration , youwill book a
short-termprofit . If the stock is below the exercise price when
thecall expires, you will still own the stock and have the chance
to write another income-producing call option.
Cooper is trading at $25.83. February $25 call options are
trading at $1.35. Buying 100 shares of the stock will cost $2,583
and selling the call will result in immediate income of $135. That
reduces thecost basis of the stock to $24.48. If the shares are
trading above $25 when the option expires, call sellers will have
to sell the stock at $25 and accept a profit of 52 cents per share
(2% in five weeks).
I would be happy to earn 2% on Cooper in the next five weeks
because gains like that represent an annualized return of more than
20% a year. If Cooper is below $25 in five weeks, we would continue
to own the stock and can sell another option. I would be equally
happy owning Cooper for the long term.
This is a short-term income trade that could evolve into a
long-term income trade. Themarket will decide when it is time to
sell Cooper, but in the meantime, this stock can be used to
generate income with a covered call writing strategy.
Action to Take -->
Buy Cooper at themarket price and sell one Cooper Feb 25 Call at
the market price for each 100 shares purchased. Set stop-loss on
Cooper at $20. If that price is reached, the call will be worthless
and the premium received for the option will be a profit that
offsets the loss. Do not set a profit target on the stock. If it is
above $25 at expiation, you will make 2% in five weeks. If not, you
will be able to sell another call option.
This article originally appeared on ProfitableTrading.com:
This Value Stock Could Yield 20% a Year Without