Trade Summary: July 25, 2016

| July 25, 2016

July 25, 2016

 

Trade Rationale

Major equity indexes are hitting new highs, but that doesn’t mean all sectors or industries are overbought.  In fact, basic materials are still trailing behind the overall market (with the exception of precious metals).  There is an opportunity to scoop up some undervalued names in this sector.

Our strategy this week is to pick up basic materials companies focusing on certain commodities having upside growth potential.  My research has led to base metals (industrial metals) as one the most undervalued areas of the sector.  We’re going to go long a copper company and a salt company more specifically.  As our hedge, we’re still going to go long, but with a gold company – which should see buyers if anything major spooks the markets.

Finally, there won’t be a portfolio update next week, but I’ll return the following Monday with a new trade theme.

The first company to buy calls on is Compass Minerals International (CMP).  The company produces market salt used for highway and consumer deicing and water conditioning, among several other uses (and other products as well).  The company has a strong balance sheet and looks to be a good value right here.

Next, we’ll buy calls in Nevsun Resources (NSU).  Nevsun operates mineral properties in Africa. Its principal product is copper, but it also explores for gold, zinc, and silver.  Copper is due for a rebound, and NSU sports a very impressive balance sheet.

Finally, we’re going to buy calls in Gold Fields (GFI).  GFI holds gold reserves in several key locations, and explores for both gold and copper.  The company produces over two million ounces of gold per year.  Even given gold’s run this year, the stock is trading at just 12x projected earnings.

 

Trade Details

#1) Buy Compass Minerals International (CMP) December 16th 75 Calls up to $2.35

For this trade, we’re looking for a move higher in CMP.  Our first profit point for conservative traders is at $77.50.  For aggressive traders, you can hold up to $80.  For risk control, the conservative exit level is $67.  Lastly, $65 is the final exit level for aggressive traders.

Compass Minerals International

#2) Buy Nevsun Resources (NSU) December 16th 2.50 Calls up to $0.90

With this trade, we’re also looking for the stock to climb.  Our first exit point for conservative traders is at $3.50.  For aggressive traders, you can hold to $4.50.  For risk control, the conservative exit level is $2.50.  And, $2 is the final exit level for aggressive traders.

Nevsun Resources

#3) Buy Gold Fields (GFI) October 21st 6 Calls up to $0.60

Finally, we’re looking for a higher move in GFI.  Our first profit-taking exit point for conservative traders is at $6.50.  For aggressive traders, you can hold to $7.50.  For risk control, the conservative exit level is $4.50.  $4 is the final exit point for aggressive traders.

Gold Fields

 

Category: AOA Trade Summary

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