Your Cabot Profit Booster portfolio closed out three more positions that were assigned at expiration last week. Those were Alcoa (AA) earning profits of $255 per contract for a yield of 13.8%; Kohl’s (KSS) earning profits of $400 per contract, or a yield of 11.1%; and Snap Inc. (SNAP) with $500 in profits earned for a yield of 10%.
Cabot Profit Booster 163
Your Cabot Profit Booster portfolio closed out three more positions that were assigned at expiration last week. Those were Alcoa (AA) earning profits of $255 per contract for a yield of 13.8%; Kohl’s (KSS) earning profits of $400 per contract, or a yield of 11.1%; and Snap Inc. (SNAP) with $500 in profits earned for a yield of 10%. The stock market has been a bit sluggish over the past week, which leads me to this week’s Cabot Profit Booster recommendation in the more defensive home-improvement sector. Here is the stock, and our covered call trade:
The Stock – The AZEK Company (AZEK)
Why the Strength
The pandemic and resulting lockdowns have had a big impact on American society and business—some negative, but some very positive. One of the biggest winners is the home improvement area, which has received a major boost as home-bound Americans tackle remodeling projects.
Azek is a big beneficiary of this trend: It’s a leading manufacturer of composite and PVC decking, railing, trim, pavers and other related building products. The vast majority (72%) of the company’s sales comes via the residential repair and remodeling (R&R) market, with another 11% accounted for by new construction and 17% from commercial markets. And Azek’s recent results, out just two weeks ago, underscore how strong the U.S. remodeling market is right now.
For its fiscal first quarter, the company reported earnings of $0.15 a share, up 650% from a year ago and three cents ahead of expectations. Sales were also hot and heavy, surging a whopping 28% in the quarter (also topping estimates) as strength was seen across its business lines. And Azek management projected sales growth of 16% this fiscal year (ending in September), nicely above its previous guidance for top line growth of 12%.
Analysts are bullish (earnings up 31% this year, 19% next), too, with the only wild card being interest rates—a backup in borrowing costs could take a bite out of the remodeling market, but right now, there’s no question Azek is firing on all cylinders.
Technical Analysis
AZEK came public last June and enjoyed a good first couple of months before falling into a typical post-IPO droop. However, like many IPOs from last year, it steadied itself and built a nice-looking launching pad for a few months. It began to show life in December and has picked up steam since, with shares reacting well to earnings two weeks ago before chopping sideways in recent days. We’d prefer to aim for dips of a couple of points, but if you wanted to nibble here we wouldn’t argue with it. Stop — 40.5
The Covered Call Trade
Buy Azek (AZEK) Stock at 46, Sell to Open April 50 Strike Calls (exp. 4/16) for $1.50, or a Net Price of 44.5 or less
Static Return: $150 per covered call (3.37%)
Breakeven: 44.5
Covered Call Return (if assigned): $550 per covered call (12.35%)
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 44.5 or less. (In this case 46 minus 1.50 = 44.50. Or another example is you could pay 46.5 for the stock and sell the call for 2, which also equals 44.5)
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 March 2, 2021.