Cabot Profit Booster 156

The Cabot Profit Booster portfolio had a spectacular 2020, aided by great stock picks from Cabot Top Ten Trader Chief Analyst Mike Cintolo, “juicy” call premiums which we sold via our covered call strategy, and a generally strong market. Now that the calendar has flipped to 2021, we will stick to the plan, and manage our open positions with an eye out for risk, while continuing to sell covered calls on the best of stocks. This brings me to today’s recommendation …

Cabot Profit Booster 156

The Stock – Kohl’s (KSS)

Why the Strength

2020 wasn’t a banner year for brick-and-mortar retailers, but a few managed to thrive despite reduced foot traffic. One such standout is Kohl’s, which bucked the retail downtrend by strategically partnering with other brands in order to drive more traffic to its stores, even forming a partnership with Amazon and accepting Amazon returns. COVID headwinds forced Kohl’s to step up its digital presence and the firm proved equal to the task.

Though Q3 revenue was 14% lower due to limited store traffic, that was actually an improvement from the prior two quarters as digital sales took up the slack, increasing 25% and accounting for 32% of total sales (up from 22% a year ago). Driving the latest strength was Kohl’s announcement that it has formed a strategic alliance with Sephora, a division of luxury brand Louis Vuitton Moet Hennessy; the new partnership will feature 2,500 square-foot Sephora shops located at the front of Kohl’s stores.

Heading into the December shopping season, Kohl’s expressed confidence that it was well positioned to capture market share. It’s also adjusting to consumers’ shifting tastes in the pandemic’s wake by moving away from dressier clothing and focusing on comfortable clothes and active wear, including plans to increase the space devoted to activewear in its stores by around 20%. Kohl’s also wants to triple beauty product sales, which it sees as a significant opportunity going forward after steady growth of nearly 40% in the last five years. Analysts see earnings rebounding to $2.33 per share this year.

Technical Analysis

After peaking at 83 in 2018, it was a long, horrid drop for KSS, with the stock eventually crashing below 12 during the pandemic low last March. The initial bounce was OK, but the stock really didn’t get going until after the election—KSS rose above its 40-week line for the first time in more than a year in mid-November and went vertical to 40 in just a few weeks. The recent monthlong rest around that area looks like a solid entry point to us. Stop — 33

The Covered Call Trade

Buy Kohl’s (KSS) Stock at 39.75, Sell to Open February 40 Strike Calls (exp. 2/19/2021) for $2.75 or a Net Price of 37 or less

Static Return: $275 per covered call (7.43%)

Breakeven: 37

Covered Call Return (if assigned): $300 per covered call (8.11%)

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, of 37 or less. (In this case 39.75 minus 2.75 = 37 Or another example is you could pay 40 for the stock and sell the call for 3.00, which also equals 37)

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

The next Cabot Profit Booster issue will be published on January 12, 2020.