News Analysis date published New: 
Tuesday, November 6, 2012 - 06:00
New Date created: 
Tuesday, November 6, 2012 - 06:00
New Date last updated: 
Tuesday, November 6, 2012 - 06:00

Collect a 5% Instant 'Dividend' on a Trade That Could Make You 40%

Tuesday, November 6, 2012 - 6:00am

Guess which commodity has performed the best during the past 10 years. Is it corn, its price spiked by ethanol production and the drought? Copper needed by China for its infrastructure build-out? Cattle, with overseas markets demanding higher quality protein?

The answer may surprise you: It's silver.

According to the U.K. Bank Lloyds TSB, silver has risen 572% since 2002. In comparison, the next largest commodity increase is gold, which is up 428% during the same period.

Silver's appeal is two-fold. First, it's seen as an investment safe-haven. Second, the precious metal is an excellent electrical conductor. As a result, silver is increasingly being used in industrial applications, such as electrical components for circuit parts and medical devices.

In the recently completed third-quarter, silver rose 25% an ounce. European and U.S. stimulus measures helped boost the precious metal and traders fled to it for safety from potentially vulnerable currencies.

One particularly attractive looking silver company is a Canadian midcap silver miner, Endeavour Silver (NYSE: EXK). Since it began publicly trading in 2004, the company has increased its silver reserves and production every year. It also mines a small but growing amount of gold.

Currently, EXK has three producing silver mines in Mexico -- one of the more politically stable countries for silver mining in the world. It purchased its third mine in April, a move that doubled the company's proven and probable silver reserves. It also caused its gold reserves to rocket 477%, to 390,000 ounces.

Moving forward, management plans to enhance mining operations, expand exploration and reduce costs. With strong potential for increased production, Endeavour's fundamental and technical outlook is bullish.

As the chart shows, the stock was in a major uptrend from August 2010 until September 2011.

In late September 2011, shares retreated from a multi-year high of $13.10, to a low of $7.55 in late spring. The break of the major uptrend line also saw the beginning formation of a major downtrend line, which lasted almost a year. On the positive side, shares established a solid wall of support in the low-to-mid-$7 range.

In late August 2012, the stock bullishly broke the major downtrend line. Shares continued to climb, reaching a peak of $10.73, before retreating.

The stock is currently trading in the high $8 range, presenting a potential buying opportunity. At current levels, the stock has plenty of room to run before hitting resistance around the $12.75 range, representing 44% potential gains.

The bullish technical outlook is supported by strong fundamentals. Third-quarter revenue jumped 34% from the comparable year-ago period, to $51.9 million. Higher metal production and the sale of some of the company's bullion inventory contributed to the gain. For the full 2012 year, analysts' project increased silver production will push revenue up 82.4% to $230.9 million, from $126.6 million in the year-ago period.

For the third quarter, silver production increased 33% from the year-ago period, to 1.1 million ounces, and gold production increased 139% to 11,700 ounces.

With greater production, full-year earnings projections are strong. Analysts expect full-year 2012 earnings to surge 209% to $0.68 per share, from $0.22 per share last year.

The company also has a strong balance sheet, with $131.6 million in cash and no long-term debt. This cash gives Endeavour the financial freedom to continue exploring and to acquire new properties.

In addition to purchasing the stock, you can earn extra income by writing covered calls. The May 2013 $12.50 strike price options are currently trading around $0.45. By writing the options, you reduce the cost basis of the trade to the mid-$8 range, as well as increase the profit potential by essentially getting paid an instant 5% "dividend."

Risks to consider: Silver is volatile and correlates with the overall "risk on" trade. An implosion in Europe, which would turn investors cautious, could mean a retreat in silver demand and silver stocks. However, Endeavour is increasing reserves and production and should be able to weather the storm.

Action to Take --> Buy EXK at the market price. Set stop-loss at $7.16, slightly below support. Sell one EXK May $12.50 Call for every 100 shares purchased. If $12.50 Call for every 100 shares purchased. IF $12.50 strike price is hit, surrender the stock and buy back the call.

This article originally appeared on TradingAuthority.com:
Collect a 5% Instant 'Dividend' on a Trade That Could Make You 40%

Melvin Pasternak does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.