The market had many ups and downs last week, and despite a nasty sell-off on Thursday the indexes closed the week mostly higher. The S&P 500 gained 0.8%, the Dow lost 0.45%, and the Nasdaq rose by 2.26%.
This week we are adding a recent earnings season winner that has held up well amidst some selling pressure in the retail sector.
The Stock – Yeti (YETI)
Why the Strength
Yeti likely needs no introduction, as it’s positioned itself as the leading brand in high-quality coolers (42% of sales), drinkware (55% of sales) and various other outdoor leisure products—that was a boon during the pandemic as outdoor gatherings around the fire pit or grill became more commonplace, but with various new products, expansion internationally and more distribution (both in-store and direct-to-consumer online), growth was able to remain solid.
But starting in the middle of last year, potholes appeared, starting with crimped margins (likely due to some knock-off products), and then came issues with quality control: Yeti stopped selling a few smaller coolers that had magnet issues and began a voluntary recall, which, combined with an iffier retail environment in general, led to sales and earnings shrinkage, partly due to loss reserves being built up for returns/exchanges and probably also because of some near-term damage to the brand.
That said, the hits have been relatively modest (after seeing earnings per share ramp from $1.06 per share to $2.60 in two years, they’re set to decline to just $2.29 this year), and the stock is strong because the Q2 report pointed to the end of the soft patch—Yeti’s sales lifted 2% in the quarter (adjusted for the recall), with some areas (direct-to-consumer up 4%; drinkware up 8%) doing much better than expected, which in turn led to stronger margins and earnings (57 cents per share was 10 cents above expectations). Analysts still see sales and earnings off some in Q3, but (a) that’s probably conservative, and (b) growth is set to resume in Q4, with the help of some new and re-released products (replacements for the aforementioned recalled coolers) coming out.
All in all, Yeti is a powerful consumer brand that looks like a mini-turnaround situation.
Technical Analysis
YETI was a big winner in the post-pandemic rally but then gave up a lot of that move during the bear, falling from 109 to 28 before bottoming out last fall. Shares popped back on earnings soon after that and pushed up to the 50 area, but that area beat back a couple of rally attempts, leading to a long sideways phase. Now, though, YETI may be waking up—the stock rallied on earnings three weeks ago (heaviest weekly volume in two years) and has traded firmly since despite some major potholes in retail stocks. Stop — 40
The Covered Call Trade
Buy Yeti (YETI) Stock at 47, Sell to Open October 47.5 Strike Calls (exp. 10/20) for $2, or a Net Price of 45 or less
Static Return: $200 per covered call (4.44%)
Breakeven: 45
Covered Call Return (if assigned): $250 per covered call (5.55%)
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 45 or less. (In this case 47 minus 2 = 45. Or another example is you could pay 47.15 for the stock and sell the call for 2.15, which also equals 45)
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 September 6, 2023.
