Cabot Profit Booster 165

The last two weeks have seen a massive rally into cyclical stocks, and a purge of growth stocks. Massive! Whether this trend will continue is anyone’s guess.

The good news for the Cabot Profit Booster portfolio is we have a relatively diverse portfolio. And as I eyeball our portfolio, I would say we have five cyclical stocks (AZEK, JCI, SONO, GS, APHA) and “only” two growth stocks (DT, AMKR), and the premiums we collected via our covered call sales have partially buffered us from big losses on those stocks that have been hit hard.

Cabot Profit Booster 165

The last two weeks have seen a massive rally into cyclical stocks, and a purge of growth stocks. Massive! Whether this trend will continue is anyone’s guess.

That being said, should those growth stocks continue to get hit, we will get stopped out, and move on to fresher ideas. But we aren’t there just yet.

This week’s idea is a retailer, which is a sector of the market we don’t yet have exposure to.

The Stock – Abercrombie & Fitch (ANF)

Why the Strength

Even as a growing number of retailers reopen for business, some have pivoted to digital sales to boost profitability. Based on recent results, Abercrombie can be counted among the early digital transformation success stories.

The nationwide casual wear retailer closed 137 brick-and-mortar locations last year, including eight flagships and 129 non-flagships, resulting in a whopping 17% reduction in its square footage. But a renewed focus on digital sales has begun producing robust results, while the much smaller store base has lowered operating expenses; operationally, Abercrombie is like an entirely new company.

In the fourth quarter, online sales increased 34% to $639 million, making up a huge 57% of quarterly revenues (for the year as a whole e-commerce represented 54% of sales). Although revenue declined 5% in Q4 (as the company previously guided for), per-share earnings rose 15% to $1.50, which was the highest level in years.

Abercrombie continued to see significant improvements in app and website traffic, resulting in the best-ever quarterly digital sales and highest gross margin rate in eight years. And while Q4 wasn’t without its challenges—including renewed lockdowns in some of its global markets and reduced store productivity—the company anticipates that Q1 sales will be up around 35% from a year ago thanks to its online business.

As alluded to above, an improving gross margin and operating expense performance outlook has caused Wall Street to re-evaluate Abercrombie. It has recently received ratings upgrades based on expectations that digital sales will only increase from here. Management reaffirmed its commitment to putting cash to work, including launching or acquiring new brands to expand its portfolio, as well as share repurchases. Analysts see earnings ripping higher this year.

Technical Analysis

Unlike many stocks, ANF was slow coming out of the gate after last year’s pandemic crash. It bottomed out last March at 8 but took its sweet time gaining any meaningful traction. It wasn’t until September that ANF really took off, rallying first to 15, then kissing the 50-day line before buying pressures accelerated. Shares have respected that trend line ever since as the advance continues unabated. Stop — 24.5

The Covered Call Trade

Buy Abercrombie & Fitch (ANF) Stock at 33, Sell to Open April 33 Strike Calls (exp. 4/16/2021) for $2, or a Net Price of 31 or less

Static Return: $200 per covered call (6.45%)

Breakeven: 31

Covered Call Return (if assigned): $200 per covered call (6.45%)

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 31 or less. (In this case 33 minus 2 = 31. Or another example is you could pay 32.5 for the stock and sell the call for 1.50, which also equals 31)

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 16, 2021.