Market Overview
Once again, the sellers stepped in last week and at least in the short term dented the bulls’ optimism. By week’s end the S&P 500 had fallen 3.35%, the Dow had lost 2.71%, and the Nasdaq had declined by 3.57%.
This week could be explosive for the market as traders anxiously await one of the last major inflation data points of the year (CPI this morning), and the Federal Reserve’s announcement on interest rates on Wednesday.
The Stock – Academy Sports (ASO)
Why the Strength
Academy Sports & Outdoors (ASO) resembles a pandemic play that saw sales for its various outdoors and sporting wears spike as people’s buying habits changed, and now business is sloughing off some due to tough comparisons (same-store sales slipped 7.2% in Q3, partly due to a decline in ammo sales). But under the hood, there’s a lot to like here, which is why the stock popped to new highs last week.
First, it looks like the same-store sales declines will ease as comparisons get easier, footwear (up 5.1% in the quarter) and apparel (up 1.5%) continue to grow and as e-commerce (up 11% from last year) does the same. (The firm stuck to its long-term outlook for low-single-digit same-store sales growth and high-single-digit total sales growth.)
Second, management is thinking big, aiming to become the largest outdoors play in the country, with its 268-store count today growing by 80 to 100 over the next five years (up 30%-plus; nine have been opened so far this year and management sees the potential for 675 locations in the long-term) that one analyst thinks could add a whopping $4 per share of earnings to the already-elevated bottom line.
And third, the stock is super cheap (~8x earnings), which has led the top brass to put a lot of money toward share buybacks of late (share count down 13.3% from a year ago!), which should help keep earnings per share up in the near term.
The bottom line here is that, instead of giving up a good portion of its pandemic-induced earnings gains, Academy should see the bottom line hold up for a bit and then push higher starting late next year. It’s a unique situation with a growth angle that should keep buyers interested.
Technical Analysis
ASO’s long-term chart is hard to beat, with a big correction in the spring, monster-volume support at the lows, a rebound back to its highs in the fall and then a tight, proper launching pad near those highs during the following three months—resulting in last week’s huge-volume breakout. Stop – 46.5
The Covered Call Trade
Buy Academy Sports (ASO) Stock at 57, Sell to Open January 55 Strike Calls (exp. 1/20/2023) for $4, or a Net Price of 53 or less
Static Return: $200 per covered call (3.77%)
Breakeven: 53
Covered Call Return (if assigned): $200 per covered call (3.77%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 53 or less. (In this case 57 minus 4 5 3= . Or another example is you could pay 56 for the stock and sell the call for 3, which also equals 53)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on December 20, 2022.
