Cabot Profit Booster 159

The stock market has been swinging up and down in recent days as investors digest fourth-quarter earnings results and look for the next catalyst to move markets. That said, it’s a good idea to get a bit more defensive with new positions, focusing on established stocks that are less volatile.

Cabot Profit Booster 159

The Stock – Goldman Sachs (GS)

Why the Strength

The Goldman Sachs name has brand recognition that gives it a very strong competitive advantage for winning investment banking business, attracting managed assets and recruiting top talent to its ranks. The firm’s global reach also provides the ability to win large deals and land sizeable accounts that smaller brokerages can’t match.

The company’s relatively stable and high-return-on-capital asset-management business is well diversified by both asset type and distribution channel. Of the company’s $2.15 trillion of assets under supervision at the end of 2020, approximately 40% are in fixed income, 25% in equities, 25% in liquidity products and 10% are in alternative investments. Fees related to the investment management business (more stable than one-time deal revenue) have risen to 17% of net revenue compared with 11%-to-12% before 2008. Put it all together and the numbers are starting to pick up—while revenues fell off the past two quarters, earnings boomed, and analysts (who are notoriously way off on their estimates for big brokerage houses) see earnings up another 10% this year to $32 per share.

Beyond the business’s nuts and bolts and recent numbers is the fact that Goldman is one of the top institutional quality Bull Market stocks out there, a group that hasn’t done much for years but has finally broken out on the upside on a longer-term basis due to valuation (this stock is less than 10 times 2021’s estimated earnings and sports a 1.7% yield) and as more of the public finally dabbles in the market. We think Goldman is a leader of this new turnaround and has a great chance to surprise on the upside over time.

Technical Analysis

GS hasn’t done much for years, like most financial and brokerage stocks; in fact, in October, the stock wasn’t much changed from where it sat back in 2007! But now the stock looks like a different animal—GS gapped up in early November and embarked on a stunning run to new highs (up 11 weeks in a row with no sign of weakness), a show of strength that rarely just up and dies. Now the stock has pulled back toward its 25-day line—yes, further dips are possible, but we like the risk/reward here. Stop — 248

The Covered Call Trade

Buy Goldman Sachs (GS) Stock at 284, Sell to Open March 285 Strike Calls (exp. 3/19/21) for $12.00, or a Net Price of 272.00 or less

Static Return: $1,200 per covered call (4.41%)

Breakeven: 272.00

Covered Call Return (if assigned): $1,300 per covered call (4.78%)

Please note - GS will pay a dividend of $1.25 per share, which we will collect as the owner of the covered call.

Also 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 272 or less. (In this case 284 minus 12 = 272. Or another example is you could pay 283.50 for the stock and sell the call for 11.50, which also equals 272)

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 2, 2021.