Playing MasTec on Trump Infrastructure Spending
Technology stocks have underperformed so far since the big win by President-elect Donald Trump, but if you believe everything he says or tweets, then the infrastructure segment will get a massive boost.
A mid-cap infrastructure play that has been lighting it up on the chart is MasTec, Inc. (NYSE:MTZ). The share price of MTZ stock is up a sizzling 40% over the past three months and a whopping 125% year-to-date.
Now don’t be alarmed at the move, as MTZ stock had been trading at a 52-week low of $12.44, so the size of the gain is somewhat overstated.
Trump rode the bank machine throughout his campaign, boldly saying he would spend $1.0 trillion dollars on rebuilding the country’s deteriorating roads, rails, waterways, hospitals, schools, and airports. That’s much greater than the mere $500.0 billion put out by rival Hilary Clinton, and you know Donald likes big numbers.
On the assumption that Trump will deliver on this bold statement, we could assume a massive increase in the demand for construction services and raw materials.
In the mid-tier space, MasTec, Inc. offers construction services for the building, installation, maintenance and upgrade of energy, communication and utility infrastructure. Energy could see a massive boost in governmental spending.
The revenue outlook for MasTec, Inc. looks good and could surprise to the upside if infrastructure spending is as high as Trump suggests.
MasTec, Inc. is predicted to ramp up revenues by 21.30% to $5.10 billion this year, and a more sedated 6.30% to $5.42 billion in 2017. (Source: “MasTec, Inc. (MTZ),” Yahoo! Finance, last accessed December 16, 2016.)
Of course, the projected growth for 2017 could be understated, depending on how much of the trillion dollars flows to MTZ stock.
The earnings side for MasTec, Inc. has been underwhelming, but things are expected to change, with sequential growth in 2016 and 2017.
A big risk for MasTec, Inc. originates from its balance sheet. There is over a billion dollars in debt and a mere $10.0 million or so in cash. A major upward push in earnings and cash flow by MasTec, Inc. will help offset this financial risk.
For investors looking at benefiting from the Trump infrastructure spending, much of the easy gains have been made in MTZ stock but, if you believe Trump, there could be more upside moves on the chart of MasTec stock.
But, instead of adding MTZ stock via buying the underlying stock, you can manage the risk vis-à-vis the use of call or put options.
An Example of MTZ Option Trade
I’m presenting an example scenario to illustrate a possible MTZ stock option trade, but this should not be construed as a recommended trade.
A bullish setup for MTZ stock could be initiated via direct call options or via a call spread. Let’s assume you want to lower the cost to establish a bullish trade.
Call Spread Scenario
(1) Buy MTZ stock $39.00 call on July 2017 for $4.90.
(2) Sell MTZ stock $50.00 call on July 2017 for $1.65.
The net cost to establish this two-legged trade is $3.25 per contract with the breakeven when MTZ stock crosses above $42.25. The maximum return is $7.75 per contract when MTZ stock trades at $50.00, for a potential gain of 158%. Of course, if MTZ closes at below $39.00, you lose the $3.25 net premium outlay, representing the maximum risk.
Chart courtesy of StockCharts.com
Say you are not that bullish, but still have an interest in picking up MTZ stock on price weakness. You can wait for a dip or alternatively sell put options to establish a lower entry price and, at the same time, receive some upfront option premium to reduce the adjusted cost base.
Put Option Scenario
Sell MTZ stock $33.00 put on July 2017 for $2.75.
If MasTec stock doesn’t retrench to $33.00, the put expires and you retain the premium.
Should MTZ stock fall to $33.00 or below, you would be required to buy the stock at $33.00, which is the price you initially were willing to pay. Your adjusted cost base is $30.25.