This week, in an attempt to keep the portfolio as diversified as possible, we are adding a stock/company that operates primary care facilities.

Cabot Profit Booster Issue: August 9, 2022

Market Overview
Aided by the belief that interest rate hikes were likely to slow down in the coming months and a generally strong earnings season, the Nasdaq has roared to life in the last three weeks. However, after a much-better-than-expected Jobs Report on Friday, the dovish Federal Reserve thesis may come back in question.

By week’s end the S&P 500 had risen marginally, the Dow was unchanged, while the Nasdaq led in a big way, with a gain of 2.2%.

This week, in an attempt to keep the portfolio as diversified as possible, we are adding a stock/company that operates primary care facilities.

The Stock – Oak Street Health (OSH)
Why the Strength
Oak Street Health operates primary care facilities for adults on Medicare living in areas that have more than 50,000 eligible patients that have incomes below 300% of the poverty line, an underserved segment.

Oak Street contracts with governments to care for patients in return for a percentage of their monthly premium, adjusted on a per-case basis for health and case complexity. That reduces costs for the government and allows Oak Street to keep any profit it generates. The company’s strategy is to keep patients happy and healthy, reckoning that an emphasis on preventative care at its 144 owned and operated centers reduces very costly hospital visits.

A typical patient has lots of needs, with the average Oak Street resident on seven or more medications and the vast majority suffering a chronic condition. About 60% of Medicare’s money is usually spent on hospitalizations and just 3% on primary care; Oak Street spends about 9% of its patient capital on primary care and estimates a 51% reduction in hospitalizations as a result.

Caring for aging Americans is a growth business, with a universe of some 30 million Medicare recipients which could support 10,000 centers in theory. The company is opening new locations at a fast pace – it’ll add some 15 centers this quarter – and feels its standardized model of centers with lots of common space and an emphasis on team care will allow it to grow much larger. Oak Street, founded in 2012, is investing a lot into its business, so will likely post a net loss of $2.29 per share this year while seeing sales rise almost 50% to $2.14 billion. Losses are widening this year on pandemic hospitalizations, but a trend of narrowing losses should return in 2023. It’s an interesting story.

Technical Analysis
OSH went over the falls with everything else starting late last year, finally finding some support in the 14 area in March. The rally from there didn’t stick, but the retest of the 13-14 area in May and June did hold and now the stock has changed character—OSH is up five weeks in a row, the last three on above-average volume, with the recent quarterly report (released August 2) helping the cause. Stop – 24

The Covered Call Trade
Buy Oak Street Health (OSH) Stock at 29.5, Sell to Open September 30 Strike Calls (exp. 9/16) for $2, or a Net Price of 27.5 or less

Static Return: $200 per covered call (7.27%)

Breakeven: 27.5

Covered Call Return (if assigned): $250 per covered call (9.09%)

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 27.5 or less. (In this case 29.5 minus 2 = 27.5. Or another example is you could pay 29 for the stock and sell the call for 1.50, which also equals 27.5)

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 August 16, 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.