This week is the expiration of March options, and the good news is we appear to be headed to full profits on four of our March positions (JCI, SONO, GS, APHA) and are in good shape with our one position that is unlikely to be called away Friday (DT). Expect to hear from me Thursday afternoon or early Friday morning on these expiring covered calls.
Cabot Profit Booster 166
This week is the expiration of March options, and the good news is we appear to be headed to full profits on four of our March positions (JCI, SONO, GS, APHA) and are in good shape with our one position that is unlikely to be called away Friday (DT). Expect to hear from me Thursday afternoon or early Friday morning on these expiring covered calls.
As for the market, it’s been a wild couple of weeks as the Nasdaq has been under heavy selling pressure, while the S&P 500 has been making new highs. Fortunately for the Cabot Profit Booster portfolio I continue to keep it as diversified as possible, which has kept us out of trouble on the growth side, while our cyclical stocks are performing well.
This goal of diversification leads me to this week’s idea …
The Stock – Summit Materials (SUM)
Why the Strength
If the economy as a whole and construction in particular is going to pick up, then it’s pretty much a sure thing that Summit will do well—the company is one of the biggest providers of construction aggregates (sand, gravel, crushed stone, slag, etc.), cement, ready-mix concrete and asphalt mixes, basically all the stuff that’s needed to build anything.
Interestingly, the firm has a bigger focus in some rural and exurban areas (Texas, Utah, Kansas and Missouri make up more than 60% of revenue), which is helping as people move out of big cities and more of those types of communities are built up. Acquisitions are also helping, with Summit usually absorbing a couple of firms a year to boost its reach.
It’s a simple story, but simple is good as the U.S. economy is set for boom times: EBITDA was actually up last year despite the pandemic, and while management has guided cautiously this year (EBITDA up in mid-single digits), big investors are sniffing out a prolonged period of big demand (and price hikes) as the firm’s end markets (especially residential housing and any potential infrastructure bill goosing public spending) look healthy. (Any pickup in non-residential building, especially low-rise commercial projects, could be very bullish for Summit.)
Analysts see earnings up 30% this year and another 20% in 2022. The firm will be having an Investor Day tomorrow, so we’ll see if the top brass has any updated outlook since the Q4 report was released nearly a month ago.
Technical Analysis
SUM is a cyclical-type name that just changed character a few weeks ago, meaning it could have plenty more gas left in the tank. The stock went through the wringer in 2018, 2019 and early 2020, and was still languishing nearly 50% off its all-time highs around year-end. But a sharp late-January pullback appears to have finally shaken out the last of the weak hands—SUM has ripped ahead six weeks in a row since then, including some big-volume buying both before and after earnings last month. Stop — 25
The Covered Call Trade
Buy Summit Materials (SUM) Stock at 30, Sell to Open April 30 Strike Calls (exp. 4/16/2021) for $1.50, or a Net Price of 28.50 or less
Static Return: $150 per covered call (5.26%)
Breakeven: 28.50
Covered Call Return (if assigned): $150 per covered call (5.26%)
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 28.50 or less. (In this case 30 minus 1.50 = 28.50. Or another example is you could pay 29.50 for the stock and sell the call for 1, which also equals 28.5)
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
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 23, 2021.