July concluded with an impressive rally, led by strong earnings reactions from mega-cap technology stocks (MSFT/AMZN/AAPL) which helped propel the S&P 500 to gain 4.25% on the week, the Dow to rise 3%, and the Nasdaq to soar higher by 4.7%.

Cabot Profit Booster Issue: August 2, 2022

Market Overview
July concluded with an impressive rally, led by strong earnings reactions from mega-cap technology stocks (MSFT/AMZN/AAPL) which helped propel the S&P 500 to gain 4.25% on the week, the Dow to rise 3%, and the Nasdaq to soar higher by 4.7%.

And while I am hopeful the market has finally bottomed, let’s see how stocks fare early this week as earnings season continues to ramp up and traders digest the Federal Reserve’s recent interest rate hikes and commentary.

This week we are executing a covered call on a clean energy play that will report earnings in the coming weeks. Because of the earnings risk, much like our Qualcomm (QCOM) trade last week we are going to sell an in-the-money call to lower our breakeven on the trade.

The Stock – Shoals Tech (SHLS)
Why the Strength
Solar stocks had already been making progress toward turning bullish again when news of an agreement on the Inflation Reduction Act last week jumpstarted interest. The bill, which still faces some risk of failing, would devote billions of dollars toward accelerating solar adoption nationally.

Clean energy is deflationary because the technology keeps getting cheaper and over time utility bills should go down. Shoals Technologies is at the heart of utilities’ photovoltaic systems, with half the solar capacity in the U.S. using its electrical balance of systems (EBOS), the collection of the components needed to gather, regulate and transfer electricity from photovoltaic panels.

The new bill would extend tax credits for solar installations out 10 years, providing lots of cost certainty for developers and helping Shoals’ sales pitch. The U.S. solar market has already been growing at a 17% annual rate, while EBOS has been growing faster, at 23%, as retrofits seek to upgrade to more efficient equipment. EBOS is about 6% of the cost of a typical utility project, with most of that taken up with labor. Shoals is focused on developing less labor-intensive ways of installing its products, saying today its systems require 43% less worker expense than competing ones.

The company’s order backlog is up 67% from last year, to $302 million, about a full year’s worth of sales. 2022 should see revenue up 47% to $315 million, with earnings lifting 36% off a low base; next year’s growth is expected to accelerate, and that was even before the proposal by Congress. Long term, any minimum domestic component requirement for tax credits would boost Shoals’ fortunes even more. Its EBOS expertise should also give it a foothold in EV chargers, systems that also require sophisticated electrical management. All in all, it’s a good solar story. Earnings are likely out in a couple of weeks.

Technical Analysis
SHLS came public in January and closed its first week at 34; nearly 10 months later, the stock was at the same level before the bear market mauled it, with shares imploding to 11 in February and, after a rally, to just below 10 in late April and early May. That’s when the repair process started though, with a push up to 20 in June and a wild consolidation for the next few weeks. And when the news came out last week, SHLS gapped above its 200-day line for the first time in months. The stock is lower priced and super volatile, but we’re fine with a small buy here. Stop — 17.5

The Covered Call Trade
Buy Shoals Technologies (SHLS) Stock at 22.5, Sell to Open September 17.5 Strike Calls (exp. 9/16) for $5.50, or a Net Price of 17 or less

Static Return: $50 per covered call (2.94%)

Breakeven: 17

Covered Call Return (if assigned): $50 per covered call (2.94%)

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 17 or less. (In this case 22.5 minus 5.50 = 17. Or another example is you could pay 22.25 for the stock and sell the call for 5.25, which also equals 17)

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 August 9, 2022.

Analyst Bio

Jacob Mintz

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.

Jacob developed his proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years.

After a successful career on the trading floor Jacob was tasked with setting up a trading desk at a top-tier options trading company, trading against the most sophisticated hedge funds and institutions in the world.

Today Jacob trades for himself, coaches and teaches about options trading, and runs our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Jacob lives in North Carolina with his wife and two kids who keep him very busy with their sports and social calendars.