The bulls once again pushed the market higher last week as the S&P 500 gained 0.77%, the Dow was the big winner with a rally of 2.42%, and the Nasdaq rose marginally by 0.38%.
The Stock – Azek (AZEK)
Why the Strength
Building products maker Azek handily beat expectations for its 2023 fiscal Q4, reported last week. Sales were up 28% from a year ago, to $389 million, while net income more than doubled to 36 cents per share, both stronger than expected.
Azek makes exterior building products, including the TimberTech decking line and the Azek Trim line for home builders and DIY repairs. Its products are composite, made mostly of recycled plastics, like grocery store bags. The end products are highly durable, moisture resistant and come in a range of wood-like colors. Homeowners like composite material because, while more expensive, they never need to be painted like wood decking and the trim doesn’t rot out. Outdoor decking is the number one remodel project homeowners take on, which helped push residential sales up 36% for Azek. The upfront cost is more than wood, which makes selling cost-conscious homebuilders on using composite more difficult, but the segment continues to grab share from wood products nonetheless based on lower lifetime costs.
Contractors increasingly see advantages in labor-saving product lines like Azek’s PaintPro, which are composite boards designed to be painted without pre-treating while drying faster than other options. Sales-wise, beating last year was fairly easy – that was a down year for residential construction – though next year presents a higher hurdle. But Azek shows signs of strength, including widening margins and an eight-week backlog of contractor orders, a return to its historical norm.
Management is a bit conservative with its outlook, but Wall Street thinks the bottom line can ramp nearly 20% next year, and if the economy stays strong, that could prove too low.
Technical Analysis
After imploding with all building and housing stocks for much of 2022, AZEK had a solid run from October of last year until this summer. But then things got ugly, with shares falling 28% in a straight line, down eight weeks in a row and briefly dipping back below the 40-week line. However, shares turned on a dime with the market, rallying five weeks in a row and then enjoying a huge-volume rally back to its August highs after earnings. Stop — 29
The Covered Call Trade
Buy Azek (AZEK) Stock at 35, Sell to Open January 35 Strike Calls (exp.1/19) for $1.25, or a Net Price of 33.75 or less
Static Return: $125 per covered call (3.7%)
Breakeven: 33.75
Covered Call Return (if assigned): $125 per covered call (3.7%)
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 33.75 or less. (In this case 35 minus 1.25 = 33.75. Or another example is you could pay 34.85 for the stock and sell the call for 1.10, which also equals 33.75)
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 December 12, 2023.
