Cabot Profit Booster 184

After a volatile week, the major market indices all closed out with losses. The S&P 500 fell 0.97%, the Dow lost 0.52%, and the Nasdaq declined by 1.87%. And the bearish sentiment continued on Monday as the S&P 500 lost another 1.6%. Which leads to a question I’ve been receiving from a few Profit Booster subscribers: “Will you keep recommending trades if the market gets ugly?” The answer is yes. In times of rocky market action, I will continue to make trades for two reasons:

Cabot Profit Booster 184

After a volatile week, the major market indices all closed out with losses. The S&P 500 fell 0.97%, the Dow lost 0.52%, and the Nasdaq declined by 1.87%. And the bearish sentiment continued on Monday as the S&P 500 lost another 1.6%.

Which leads to a question I’ve been receiving from a few Profit Booster subscribers: “Will you keep recommending trades if the market gets ugly?”

The answer is yes. In times of rocky market action, I will continue to make trades for two reasons:

First, Mike Cintolo is able to bob and weave with the market, and does a great job finding stocks that are outperforming not only their peers, but the market in general.

Second, in volatile markets options premiums explode, making these trades potentially more lucrative. Also, these rising premiums give us more cushion which inherently reduces our risk on each trade.

However, I will also start to move to more defensive stocks. And like you, I was concerned about the market recently, and that is why in the last two weeks I’ve picked “boring” F and LB, as they are less likely to implode at a rapid rate versus a high valuation growth stock.

The next step I will take is to sell at or in-the-money calls, which will allow us to collect bigger premiums, while simultaneously giving us a more defensive posture on the downside.

In addition, keeping diversification at the forefront is one of the key factors in maintaining our long-term success. This week I will be a adding developer and producer of semiconductors and related technology, Marvell Technology Group (MRVL).

The Stock – Marvell Technology Group (MRVL)
Why the Strength
Marvell is a leader in fabless chip design, specializing in chips that play in some of the fast-growing digital trends.

Marvell’s acquisition of networking equipment outfit Inphi, which was just approved in China, has been a big reason for the recent strength. Indeed, the deal is expected to increase Marvell’s cloud networking leadership and 5G position while boosting profit margins (management expects the deal to account for $215 million in Q2 revenue).

Another source of strength is Marvell’s partnership with Samsung, as the two jointly announced a new system-on-a-chip (SoC) to enhance 5G network performance. (The SoC improves cellular radios by increasing their capacity and coverage, while decreasing power consumption by up to 70%.)

Marvell’s revenue rose to $832 million in its fiscal first quarter (up 20%) while per-share earnings of 29 cents beat estimates by 7%. The latest results were driven by strong demand in both segments: Marvell’s networking business expanded 26% and was 60% of total sales, while the storage business increased 17%, accounting for 36% of sales.

Within those, demand for the company’s data processing units remains high, and its automotive segment is growing rapidly with Marvell’s ethernet switch shipping into multiple model-year 2021 vehicles (and which it sees contributing “meaningfully” toward revenue growth in coming years).

Management guided for Q2 revenue of $1.07 billion—up 47% and in line with estimates—with earnings expected to rise 50%.

Looking ahead, Marvell said it sees the biggest opportunity in the cloud (even bigger than 5G!) and sees tailwinds from the ongoing global chip shortage.

Technical Analysis
After breaking out of a multi-year base last May, MRVL rose in a choppy fashion to a record high before hitting the wall at 55 in January. Shares then dropped sharply and briefly penetrated the 40-week line before finding support by March.

A couple more months of choppiness followed, but the stock retested its low in May, leading to a persistent push (up seven weeks in a row) to new price highs last month. The pullback of late has been sharp (no surprise) but normal. Stop — 48.50

The Covered Call Trade
Buy Marvell Technology (MRVL) Stock at 55, Sell to Open August 55 Strike Calls (exp. 8/20/2021) for $2, or a Net Price of 53 or less

Static Return: $200 per covered call (3.77%)

Breakeven: 53

Covered Call Return (if assigned): $200 per covered call (3.77%)

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 53 or less. (In this case 55 minus 2 = 53. Or another example is you could pay 54.75 for the stock and sell the call for 1.75, which also equals 53)

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 27, 2021.

Cabot Wealth Network
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Chief Investment Strategist: Timothy Lutts
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