The market continued to test new highs last week as the S&P 500 gained 0.71%, the Dow climbed 0.87%, while the Nasdaq broke trend by closing 0.9% lower. That being said, we continue to see thin summer trading led by ongoing sector rotation. Growth waned last week and it was the cyclicals’ time to shine, with the financials leading the way.
Cabot Profit Booster 188
The market continued to test new highs last week as the S&P 500 gained 0.71%, the Dow climbed 0.87%, while the Nasdaq broke trend by closing 0.9% lower.
That being said, we continue to see thin summer trading led by ongoing sector rotation. Growth waned last week and it was the cyclicals’ time to shine, with the financials leading the way.
And while the bears continue to point to the negative headlines, none of it matters until the bulls stop the frenzied dip buying. As a result, my sentiment continues to remain cautiously optimistic.
Finally, before we dive into this week’s idea, I wanted to note that this is expiration week. Expect to hear from me Thursday afternoon, or Friday morning, with instructions as to how we will manage our positions expiring this week, including the ice cream headache that is BBWI/VSCO.
This week’s pick is an American medical device and welding/cutting manufacturer, Colfax (CFX).
The Stock – Colfax (CFX)
Why the Strength
Colfax is an intriguing special situation, and the firm is set to split into two companies early next year: A medical implants business and a welding and cutting equipment manufacturer.
Going back, Colfax’s strategy has been to grow by acquisition and improve the businesses through productivity enhancements, but around 2015, the approach faltered. Management jettisoned underperforming businesses in 2019, and this March, Colfax announced the remaining two business lines would separate; investors are clearly thinking the move will unlock some value.
The medical technology arm, which is anchored by DJO Global, has been facing headwinds from delayed elective surgeries due to the pandemic. But those are dissipating, with its latest quarter seeing sales leap 73% from a year ago, with cash flow solidly positive. DJO does well in reverse shoulder implants, a fast-growing surgery, and its specialty in reconstructive surgery is generally less cyclical.
Meanwhile, the welding segment, ESAB, is one of three companies offering a full package of welding systems, from equipment to data systems that manufacturing clients use to boost reliability. For a long time, ESAB was an also-ran in its segment, but no longer—ESAB’s revenue was up 54% in its latest quarter to $630 million, with $113 million in cash flow.
There are a lot of moving parts here, but we think the catalyst will keep investors interested.
Technical Analysis
CFX had established a ceiling of 40 from 2015 into this year, finally cracking it after earnings in February.
The March announcement of the split rallied shares up to a multi-year high of 50, before easing back into the low 40s.
CFX’s base since then looks solid, with some good-volume buying during the last three weeks. If you’re game, you can start a position around here. Stop — 44.50
The Covered Call Trade
Buy Colfax (CFX) Stock at 48.50, Sell to Open September 50 Strike Calls (exp. 9/17) for $1 or a Net Price of 47.50 or less
Static Return: $100 per covered call (2.1%)
Breakeven: 47.50
Covered Call Return (if assigned): $250 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 47.50 or less. (In this case 48.50 minus 1 = 47.50. Or another example is you could pay 49 for the stock and sell the call for 1.50, which also equals 47.5.)
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.
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| Nutanix (NTNX) | 39.15 | 36.00 | 32.5 | August 40 -- $2.00 | $0.01 |
| Ford (F) | 14.13 | 13.20 | 12.6 | August 15 -- $0.48 | $0.02 |
| Marvell Technology (MRVL) | 55.25 | 58.30 | 48.5 | August 55 -- $2.30 | $3.30 |
| Snap (SNAP) | 74.00 | 71.50 | 68.0 | August 78 -- $2.10 | $0.22 |
| Dynatrace (DT) | 64.70 | 61.50 | 55.0 | September 65 -- $3.20 | $1.25 |
| ON Semiconductor (ON) | 44.60 | 43.00 | 40.0 | September 46 -- $1.40 | $0.60 |
The next Cabot Profit Booster issue will be published on August 24, 2021.
Cabot Wealth Network
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President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
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