For now our positions remain in great shape, and this week we are adding a stock that we successfully traded in March, and has shown no signs of pulling back after an earnings blowout last week.
Cabot Profit Booster 138
Despite the S&P 500 and Nasdaq continuing to advance, under the surface there are some warning signs that the market may be weakening.
That being said, for now our positions remain in great shape, and this week we are adding a stock that we successfully traded in March, and has shown no signs of pulling back after an earnings blowout last week.
The Stock – JD.com (JD)
The boost in e-commerce due to the coronavirus pandemic has been global, and JD.com is one of the big beneficiaries of that trend in China, as it’s China’s largest direct-to-consumer retailer (sort of like Amazon here in the U.S.).
In its second quarter report, the company said that its customer count jumped 30% year-over-year, to 417.4 million, with 80% coming from lower-tier cities across China, an encouraging sign that the e-commerce trend is really broadening out. That growth resulted in revenues climbing to 201.1 billion yuan ($28.5 billion), up 30% from last year, which marks a big acceleration. (Both EPS and revenues beat analysts’ expectations.)
The Chinese retail market is rapidly going digital, with e-commerce penetration rising from 6% in 2012 to 25% in the first half of 2020, and with the top 20 retailers in China controlling only 18% of the market (compared to 48% that the top 20 retailers in the U.S. have), the potential for JD to grow its market share even further is immense.
But retail e-commerce is just the beginning for JD. Last year, it spun out its healthcare unit (JD Health) into a subsidiary that offers 30-minute pharmacy delivery, telemedicine service (a big beneficiary of COVID-19), genetic testing and solutions to digitize hospital systems. Its JD Cloud supports its own marketplace and provides digital services to other companies and government agencies. And JD just announced it has acquired a controlling stake in Chinese express transport company Kuayue Express Group for three billion yuan ($432 million). Analysts expect the good times to continue, as do big investors.
Technical Analysis
JD broke out around the turn of the year and got to 42 before starting to chop around. But even through the crash, the stock was hitting higher highs (45 in March, 48 in April), with its uptrend gaining steam in May and June. Then came a beautiful, tight five-week base before exploding to new highs following the quarterly report. Stop — 65
The Covered Call Trade
Buy JD.com (JD) Stock at 77, Sell to Open September 78 Strike Calls (exp. 9/18) for $2.50, or a Net Price of 74.5 or less
Static Return: $250 per covered call (3.35%)
Breakeven: 74.5
Covered Call Return (if assigned): $350 per covered call (4.69%)
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 74.5 or less. (In this case 77 minus 2.50 = 74.5. Or another example is you could pay 76.75 for the stock and sell the call for 2.25, which also equals 74.5)
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 …
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