The bulls continued their winning ways last week, but the advance wasn’t without some jostling. Late in the week several leading growth stocks pulled back, but those declines weren’t enough to keep the bulls from another weekly victory.
The S&P 500 gained 0.93%, the Dow advanced 0.78% and the Nasdaq rose 1.11%.
To put this market run into perspective, the current rally has lasted 189 days, basically nine months, without a 5% pullback. Additionally, there have been 43 days of a recorded new high.
So, my stance hasn’t changed too much. I continue to take a cautious but optimistic approach.
Cabot Profit Booster 187
Please note: Later today, or tomorrow, we will be revisiting our LB spinoff (BBWI1, VSCO, etc). Be on the lookout for that email.
The bulls continued their winning ways last week, but the advance wasn’t without some jostling. Late in the week several leading growth stocks pulled back, but those declines weren’t enough to keep the bulls from another weekly victory.
The S&P 500 gained 0.93%, the Dow advanced 0.78% and the Nasdaq rose 1.11%.
To put this market run into perspective, the current rally has lasted 189 days, basically nine months, without a 5% pullback. Additionally, there have been 43 days of a recorded new high.
So, my stance hasn’t changed too much. I continue to take a cautious but optimistic approach.
This week’s pick is semiconductor supplier ON Semiconductor (ON), which recently reported blowout earnings.
The Stock – ON Semiconductor (ON)
Why the Strength
Semiconductors remain a high-growth business, with the global industry seen expanding 12% a year in the middle of what researcher IDC says is a super cycle of demand, thanks to the Internet of Things and electrification. But that doesn’t mean all chips are created equal.
When the sector isn’t in a pandemic-induced global supply crunch as it is now, some chips are commodities. ON Semiconductor makes thousands of circuits, many of which have been “fab fillers,” selling into products that tend to surge and decline with the economic cycle.
But new CEO Hassane El-Khoury took over in December (leaving Cypress Semiconductor) with a focus on shifting ON toward higher-margin pieces that should see steadily rising demand, such as those for autonomous and electric vehicles and renewable energy.
The early signs of the strategy are promising: As the firm shifted capacity into making more profitable chips, ON’s second-quarter sales grew 38% year over year. That included a 69% jump in sales to automakers, who feature an increasing number of computing-heavy features in their models, from blind-spot sensors to big driver displays. Revenue for Q3 should be more than $1.6 billion, a 23% gain, with EPS of 67 cents (more than double a year ago).
Some of the growth stems from pricing power that should abate as global supply chains come back to normal, but the firm should make up for that by expanding its manufacturing capabilities—the company recently opened manufacturing in a New York facility that will fabricate 300 millimeter chips, a size in demand these days for cloud computing and other applications. Even better, after the Q2 report, the top brass hosted a bullish Analyst Day, saying it expects margins to surge over the next four years with free cash flow likely to reach $2 billion annually by 2025.
Technical Analysis
ON had a big run during the pandemic, effectively topping around 42 in February (though it did make one more modest new high in April).
The correction after that was tedious, like so many stocks, though there were some signs of support along the way (including two big-volume support weeks in mid-May).
After tagging the 40-week line, shares began to bounce, but it was last week’s Q2 report and Analyst Day that launched ON to new highs. We’re OK starting a position here with a tight stop. Stop—40
The Covered Call Trade
Buy ON Semiconductor (ON) Stock at 45.20, Sell to Open September 46 Strike Calls (exp. 9/17) for $1.50 or a Net Price of 43.70 or less
Static Return: $150 per covered call (3.43%)
Breakeven: 43.70
Covered Call Return (if assigned): $230 per covered call (5.26%)
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 43.70 or less. (In this case 45.20 minus 1.50 = 43.70. Or another example is you could pay 45 for the stock and sell the call for 1.30, which also equals 43.70)
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 …
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 17, 2021.
Cabot Wealth Network
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Chief Investment Strategist: Timothy Lutts
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