Despite January’s rally in the S&P 500 (^SPX), there are still plenty of reasons to continue gaining exposure to quality U.S. stocks, such as Kronos Worldwide (NYSE:KRO).
The Fed’s easy-money policies will continue to keep the company’s borrowing costs low, and corporate profits should continue to exceed expectations. Furthermore, while Europe is by no means out of the woods, it appears that every precaution is being taken to prevent a sudden, cataclysmic shock to the markets — such as a country’s disorderly departure from the euro.
If the status quo continues, we expect U.S. equities to continue to perform well as the world looks for a place for its cash … and for Kronos to outperform.
The story behind Kronos is one of profitability and value. The company produces titanium-dioxide pigments, which are used to whiten, brighten and add opacity to thousands of commonly used products, like paints, plastics, inks and cosmetics.
Year-to-date the stock is up 29%, which is due to the company’s ever-expanding margins. Currently Kronos’ operating margins are the highest among the commodity chemicals industry at 28.9%.
The stock trades at 10.1 times earnings and offers investors a healthy 2.5% dividend as well. The current analyst consensus price target for Kronos is $34, or a 40% return from current levels.
To play this stock we want to buy the KRO March 22.50 Call and at the same time sell the KRO March 25 Call to reduce the trade’s upfront cost. The result is a balanced position that risks $1.25 and can return 100% on risk, should Kronos close above $25 (the upper strike price) at March options expiration. This would be a 3% move from current levels, making this a high-probability bet on a continued bull market in U.S. equities.
Here’s a summary of this trade…
Stock Price: $24.34
Option Play: Long Call
Buy: March 22.50 Call @ $2.50
Sell: March 25 Call @ $1.25
Net Cost: $1.25 = $2.50 – $1.25 (Long Call – Short Call)
Breakeven: $23.75 = $22.50 + $1.25 (Long Strike + Net Cost)
Max Profit: $1.25 = [($25 – $22.50) – $1.25] (Spread Width – Net Cost)
Max Loss: $1.25 = Net Cost