Cabot Profit Booster 183

This Friday marks the expiration of July options, and if everything holds steady, our calls in MRO, GPRO and SGMS will expire worthless. As a result, we will maximize the call premium on each position. Per usual, on Monday I plan to sell my shares in each position and start the search for more opportunities.

Cabot Profit Booster 183

This Friday marks the expiration of July options, and if everything holds steady, our calls in MRO, GPRO and SGMS will expire worthless. As a result, we will maximize the call premium on each position. Per usual, on Monday I plan to sell my shares in each position and start the search for more opportunities.

However, we still have a few trading days left in the week, so expect to hear from me Thursday on exactly how I plan to approach each position through expiration.

As for the market, the bulls continued to push all the major indexes higher last week. For the week the S&P 500 added 0.40%, the Dow gained 0.24%, and the Nasdaq advanced by 0.43%.

The push higher further crushed volatility and continued the erosion of our call premium, which certainly helped our positions as we entered the final week of July expiration.

Otherwise, not much has changed. The market continues to rotate from one sector to the next with tech being the ultimate market stalwart. And, as always, we will continue to try and take advantage of the ongoing rotation by pouncing on what we feel are the best opportunities the market has to offer, while keeping the portfolio diversified.

Keeping diversification at the forefront, we are going to take advantage of the post-pandemic spending surge and add some retail exposure.

The Stock – Limited Brands (LB)
Why the Strength
L Brands is partially an economic reopening play, but a big reason for the stock’s resilience is that it’s dramatically reshaping itself, with the retailer about to spin Victoria’s Secret off into a separate company and renaming itself after the stronger of its two primary brands, Bath & Body Works.

The moves come as a cap to L Brands’ reversal of four years of eroding earnings—the firm has posted three earnings gains in a row, including a blow-out $1.25 of EPS in Q1. For the rest of this year, management guided analysts higher with sales now seen rising 6% to $12.6 billion, with EPS coming in around $5.50, which is a step function move higher after years of earnings in the $2.30 to $3.20 range.

The restructuring makes sense: Bath & Body Works is the growth driver these days, selling personal care and beauty products and enjoying a 12% gain in comparable stores sales in Q1. Many of that chain’s 1,735 or so stores are in malls, which means they should benefit from the return of shoppers, too.

Also helping, though, is simple addition by subtraction: Investors are pleased to see Victoria’s Secret and its associated brand Pink be spun out, as sales have cascaded lower and are now less than half of L Brands’ total. (A private equity firm was set to take Victoria’s Secret off L Brands’ hands in early 2020, but changed its mind when the pandemic hit.)

The good news, kind of: Sales declines for Victoria’s Secret slowed to just 7% below the same period in 2019 even as the number of locations shrunk in a big way. Once the spin-off is completed on August 2, L Brands’ future earnings power should be a lot brighter.

Technical Analysis
LB has had a huge, huge run during the past nine months, but it’s certainly not acting like the sellers are taking control—instead, it’s acting like it wants to go higher and higher from here. The two-month rest period that started in early April was normal, and after a mini-shakeout in May, LB has stormed back to new highs, including today’s big-volume rally. Stop — 65.50

The Covered Call Trade
Buy Limited Brands (LB) Stock at 76.50, Sell to Open August 77.5 Strike Calls (exp. 8/20) for $4.80, or a Net Price of 71.70 or less

Static Return: $480 per covered call (6.69%)

Breakeven: 71.70

Covered Call Return (if assigned): $580 per covered call (8.09%)

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 July 20, 2021.

Cabot Wealth Network
Publishing independent investment advice since 1970.

President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
Cabot Heritage Corporation, doing business as Cabot Wealth Network
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