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Covered Calls: Income from Elf

01/17/2003 12:00 am EST


Neil George

Editor, Profitable Investing

"What to avoid in this market is simple: the well-known stocks that dominate the leading indexes," warns Neil George, global investor and editor of the online service, "While those well-touted stocks will get a day or two in the limelight, they'll lose money eventually, just like they've done the last few years. Our goal is to find solid, low-key companies with real assets and cash-generating capabilities." Here's one such pick.

"It makes sense to have some ownership in one of the most important businesses in the world's economy--oil. I continue to buy and hold TotalFinaElf (TOT NYSE). This oil giant is one of the cheapest of the majors and it's one of the most efficient of its major peers in the US and beyond. The company trades at a discount to its trailing sales while most of the majors trade at a premium. Yet Total's revenue growth has been triple that of its peers.

"And how about margins? If you're going to drill, pump, and process a raw good, it's all about margins. And Total's margins are higher and expanding by more than double the other big traditional oil companies, which contributes to a solid and better-performing company--justifiable to own with or without a crisis or guru shillings. Now, the trouble is that as oil has rises and falls from crisis to resolution and back, all market sectors--including Total--might be victim to periodic corrections. That's why the Total covered calls are also part of the portfolio--to keep the wheels greased through the added income flow.

"To add an income flow to this recommendation, we suggest a covered call strategy. We suggest buying the stock and also writing February 70 calls , which will pay you income in exchange for limiting your upside. When the calls expire, look to roll them over for another payout. If you don't own Total, buy it with the covered call write, which will protect you somewhat from a near-term correction and if the shares stay constant or rally a bit you'll be able to reap a quick 5% profit, which may well be repeated again and again in the ensuing months."

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