Cabot Profit Booster 153

This Friday is the expiration of our December covered calls, and I am happy to report that all five of our positions are in good/great shape. As is always the case, expect an email from me Friday morning breaking down where we stand with each position.

Cabot Profit Booster 153

Since our last covered call idea, last Tuesday, the market has become a bit rockier – not a terribly surprising development given the rapid rise in the indexes since the November election. These market wobbles, and intense sector rotations, are totally normal, but also re-enforce our efforts to own a diverse portfolio of stocks. Which brings me to this week’s idea.

The Stock – Adient (ADNT)

Worldwide automotive demand is in the midst of a resurgence after the early-year production shutdowns; China’s SUV, minivan and sedan sales increased by double digits last month, while U.S. consumer car demand has improved in recent months (and new vehicle sales are expected to rise a further 12% in 2021). This is good news for companies that serve the auto industry, including Adient, which is the world’s largest maker of seats for automobiles, and does good business making seats for airlines, too.

Adient (the result of a spin-off from Johnson Controls) suffered with the entire industry during the recession (sales off 61% in the second quarter!), but there were already signs of a big rebound in the summer and fall; in Q3, revenues fell “only” 8% from a year ago, but big investors took heart that per-share earnings of $1.15 coasted past the consensus by 44 cents and were up 83% from last year’s tally. And, of course, with global auto production restarting, vehicle production is trending higher and the company’s cost-cutting measures are paying off.

Beyond industry factors, Adient’s recent sale of its automotive fabrics business (for $175 million) will allow the firm to focus on growing its core, high-volume seating business going forward. The company’s liquidity position has also notably improved to a robust $2.5 billion, which should give it plenty of ammo to continue its operational improvement and restructuring efforts.

Further, Adient’s order book is quite strong, as the company has lately secured program wins from Ford, Jeep, Tesla and GMC, among other big auto makers. Management believes next year will be a good one, and analysts agree, forecasting 17% revenue growth for 2021 and an earnings rebound to north of $4 per share.

Technical Analysis

ADNT topped out back in 2018 and had a doozy of a decline, falling from a peak of 85 to a rock-bottom low of 6 in March of this year. It rallied with the rest of the market in April and May, then spent all summer building a base between 15 and 20. The kickoff came in early October, when a restart of operations caused a buying spree that continued though the middle of last week. Stop — 28.5

The Covered Call Trade

Buy Adient (ADNT) Stock at 35.5, Sell to Open January 36 Strike Calls (exp. 1/15/2021) for $2, or a Net Price of 33.5 or less

Static Return: $200 per covered call (5.97%)

Breakeven: 33.50

Covered Call Return (if assigned): $250 per covered call (7.46%)

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 33.5 or less. (In this case 35.5 minus 2 = 33.5. Or another example is you could pay 35.75 for the stock and sell the call for 2.25, which also equals 33.5)

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