Before I dive into today’s idea, I did want to note that next week’s Profit Booster issue will be sent on Wednesday, February 21 because of Presidents’ Day.
Also, Snap (SNAP) stock got hammered on earnings late last week, and the stock fell below our stop. Because of that today we are going to exit our position.
To execute this trade you need to:
Sell your SNAP stock
Buy to Close the February 17 Call
Despite some under-the-surface concerns, it was another strong week for the market as the S&P 500 gained 1.5%, the Dow was mostly unchanged and the Nasdaq added 1%.
This week should be somewhat quiet, though earnings season continues to roll on.
The Stock – Azek (AZEK)
Why the Strength
More and more homeowners prefer eco-friendly, easy-to-maintain outdoor siding and decking options for their houses—especially as traditional wood products become more expensive, hence boosting the total cost of ownership advantages for the firm’s offerings.
Chicago-based AZEK is recognized as one of the market leaders in outdoor living products (decking, siding, molding and lighting), most of which are made from approximately 90% recycled material and designed to replace the use of wood on the outside of homes; the company plays in both the residential market (capped polymer and composite decking, railing, porch, lighting and paver products) and the commercial segment (high-quality bathroom lockers and partitions).
AZEK’s premium portfolio of outdoor products is high-margin and is benefiting from declining raw material costs and improving manufacturing productivity, attributes that were highlighted during last week’s earnings call when management pointed to “strong gross margin performance and more normalized production levels.” Revenue in fiscal Q1 (ended December 31) increased 11% from a year ago to $240 million, driven by a 24% boost in residential sales, while earnings of 10 cents a share topped estimates by nine cents (the reason for the stock’s strength). Adjusted EBITDA grew “substantially” while EBITDA margins expanded 16 percentage points to 23%, and the firm’s contractors reported project backlogs of seven weeks—above pre-pandemic levels and suggesting Q1 sales weren’t due to backlog drawdowns.
Going forward, AZEK plans to increase its use of recycled materials and improve product designs, which it sees leading to further margin expansion, while optimism remains that lower mortgage rates (despite the recent upmove) will goose the housing market. Wall Street hiked estimates nicely after the report and sees fiscal 2024’s bottom line lifting more than 50%, with further growth beyond that.
Technical Analysis
AZEK got back to 35 last August before being hit with a wave of selling, falling eight straight weeks as the market sank into its final low. The rebound from there was terrific, though, with shares pushing to new highs in just seven weeks—and, nearly as impressive, AZEK then formed a very tight, quiet, five-week zone between 35 and 39, suggesting big investors were holding on tightly to their positions. New highs came two weeks ago, with last week’s reaction leaving no doubt the buyers are in control. Stop — 39
The Covered Call Trade
Buy Azek (AZEK) Stock at 44, Sell to Open March 45 Strike Calls (exp. 3/15) for $1, or a Net Price of 43 or less
Static Return: $100 per covered call (2.32%)
Breakeven: 43
Covered Call Return (if assigned): $200 per covered call (4.65%)
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 43 or less. (In this case 44 minus 1 = 43. Or another example is you could pay 43.80 for the stock and sell the call for 0.80, which also equals 43)
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 February 21, 2024.
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