Buy Alert: Vale S.A. (VALE)

By Jim Pearce • July 5, 2017

TRADE INSTRUCTIONS
Date: July 5, 2017
Name: Vale S.A.
Symbol: VALE (NYSE)
Type: Open
Limit: Buy below $9

TRADE TARGETS
Holding Period: 3 months
Target Return: 13.8%
Annualized Return: 55.2%
Target Price: $10.25
Stop Loss Level: $7.65

COMPANY DESCRIPTION
Vale S.A. is based in Brazil and is a global producer of iron ore and iron ore pellets, key raw materials for steelmaking, and producer of nickel. The Company also produces copper, metallurgical and thermal coal, potash, phosphates and other fertilizer nutrients, manganese ore, ferroalloys, platinum group metals, gold, silver, and cobalt. Link to company website.

TRADE RATIONALE
Even when it comes to momentum stocks, our Rapid Profits Matrix prefers a contrarian approach of looking for companies that appear undervalued despite having rallied during the previous year. In this case it has zeroed in Vale S.A., which is a Brazilian miner that generates most of its revenue from iron ore sales to China.

Despite appreciating 70% over the past twelve months, VALE sports a high Book/Market ratio (BMR) of 0.88. The BMR is the inverse of the Price/Book ratio and indicates how much of a company’s stock price is backed by actual accounting assets versus investor optimism over future performance.  The higher the BMR, the less “air” there is the share price.

Of course, a high BMR does not by itself confer a short-term trading opportunity. In addition, VALE also sports a gross margin of 36%, an 89% improvement over last year’s figure. As a result, it has improved its current ratio to 2.0 from 1.5 times short-term liabilities and decreased its ratio of long-term debt to assets by 7% at the same time.

To a certain extent, VALE tends to trade as a proxy for expectations over future infrastructure investment by China. In its most recent quarterly report, the company noted that it “reached a record for a first quarter” for iron ore production in Q1. By the end of this month, we should know if that trend held up during Q2.

Perhaps more importantly, and potentially giving a one-time boost to its share price, is Vale’s transition into a corporation later this year. The potential economic benefits of functioning as a fully independent company could cause analysts to revise future earnings projections for VALE upward, giving the share price a quick pop in the process.

NOTE: VALE is optionable, and the 9/15/2017 $9 call options show considerable open interest (oddly, so do the $15 call options; someone is an optimist!).

Stock Talk

Comments Guidelines
Rick

Rick

Bought the Sep $9 Call at $0.53.

Dramatic License

Dramatic License

Ditto that for me.

Tom Getz

Tom Getz

I also bought 2 calls at .55. I’m not sure how to use them, maybe you can help?
If VALE goes over $9, do I sell the calls at a profit, or do I buy the stock and sell it? Do calls go up in price correspondingly?

Rick

Rick

Tom,

The calls won’t go up $ for $, but we will likely want to sell the calls if they reach a certain point in value. Since Jim is only looking for an increase to $10.25, we’d likely want to sell before we get there.

The implied volatility on the Sep 9 calls that we bought is 41.38%, so that indicates that we should expect a $0.41 increase in the option value for every dollar that stock increases. So, if we held the stock until the price hit Jim’s target of $10.25, the option price would increase by around $0.60 (10.25 would be a 1.50 increase over the current stock price times the 0.41 implied volatility = a little over $0.60). At that price, we would have an over 110% return.

Since Jim is only targeting a 13.8% return for a 3 month holding period, I will likely be very happy to exit if the stock goes to $9.50 to $9.75. At those prices our options should be worth a gain of $0.30 to $0.40 – which would be a return of 55% to 75%.

That is how the options juice the returns on Jim’s pciks. Of course, there is the greater downside that goes with this. Jim has a stop loss at $7.65. That would represent a $1.10 loss or -12.5% for the stock. At that stock price our options would be close to worthless so we would loss almost all of our investment.

I hope this helps.

Tom Getz

Tom Getz

Thank you so much. Definitely helps.
I have never bought options before, only sold them. This will be a first, and at least my loss is limited to the cost.

Dramatic License

Dramatic License

Typically I would wait till the calls go up in value to a point you want to sell at and them sell them. You could wait until the stock is assigned (or exercise the option), but if you are planning to sell it anyway, then it is easier to sell the calls. If the stock goes up quick you also still have time value so the calls could be more valuable than just getting the stock and selling it.

Dramatic License

Dramatic License

Or just read what Rick wrote which explains it more thoroughly. 🙂

Tom Getz

Tom Getz

Thank you. It was great that both of you were willing to help. I appreciate it very much.

Rick

Rick

Tom, I sold the calls today at $0.84.

Tom Getz

Tom Getz

Oops! I didn’t see this message. Guess I did not get a notice.
However, I was waiting for Vale to get closer to $10, which it looks like it will hit today. I’ll see if I can sell my calls for a good profit? Never did this before, hopefully it will be simple?
Thank you again.

Jim Pearce

Jim Pearce

Tom – VALE is still a holding in this portfolio, so you will only get a notice when this position is closed (or otherwise modified) by us. If you are following the buy/sell actions of other SW subscribers then you should watch this message board regularly for any updates they might post regarding their positions.

Jim Pearce

Jim Pearce

I just raised the stop price for Vale to $9.90, so you should get an alert from me today about that. If you do not, then please contact our Customer Service department so they can set you up for alerts.

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