The recent August expiration cycle was our second disappointing month in a row. And while 18 wildly successful months of trading out of 20 is a truly spectacular track record, when trades go wrong there is little doubt it’s painful in the moment. However, trading/investing isn’t about being a prisoner of the moment. It’s about building wealth over time, which the Cabot Profit Booster has been very successful at since its inception in early 2020.
Cabot Profit Booster 189
The recent August expiration cycle was our second disappointing month in a row. And while 18 wildly successful months of trading out of 20 is a truly spectacular track record, when trades go wrong there is little doubt it’s painful in the moment.
However, trading/investing isn’t about being a prisoner of the moment. It’s about building wealth over time, which the Cabot Profit Booster has been very successful at since its inception in early 2020.
Moving on …
The market pulled back in the middle of last week, but the dip buyers stepped back in Friday which helped to minimize the blow. By week’s end the S&P 500 declined 0.59%, the Dow dropped 1.11%, and the Nasdaq fell 0.73%.
Friday’s dip buying carried over into Monday as the Nasdaq rose to a new all-time high. The S&P 500 almost hit a new high on Monday, but pulled back slightly at the close, narrowly missing its 45th day this year with a 52-week closing high.
The S&P 500 has been 8% above its 200-day moving average for close to 10 months now, a streak the market hasn’t seen in over 40 years.
It is anyone’s guess how long the current bullishness will last. Calling tops and bottoms is all about ego. I will continue to remain steadfast with my “cautiously optimistic” outlook until I see market action state otherwise.
This week’s pick is manufacturer and building materials supplier, Builders FirstSource (BLDR).
The Stock – Builders FirstSource (BLDR)
Why the Strength
When you think of major nationwide players in the housing market, few minds go to Builders FirstSource—in fact, we’d bet few have heard of the outfit—but the firm is the largest supplier of structural building products to the professional market for new residential construction, repair and remodeling.
Product-wise, FirstSource is benefiting from inflation; about 38% of sales (mostly in the lumber and lumber sheet category) are commodity exposed, but management has made a big push into more value-added products (specialized offerings, manufactured products, windows, doors and millwork, etc.), which brings with it higher margins and more stable demand trends.
A big part of the story here is M&A—the company has acquired a ton of firms over the years, and two recent ones look interesting. The first is Alliance, the largest supplier of building materials in Arizona, where FirstSource didn’t have a significant presence, for $400 million; and the second is WTS Paradigm, a software outfit that FirstSource believes can help digitize both its own operation and much of the homebuilding industry (through licensing of its software to others, etc.). Overall business is booming, and while a lot of it is due to the acquisitions and commodity inflation, core organic sales lifted 35% in Q2 while EBITDA soared 231%, crushing expectations.
All in, the top brass sees free cash flow of around $1.5 billion this year (15% of the market cap!), and while that figure will likely fade in 2022 somewhat as commodity prices ease (analysts see earnings retreating 30%), management is more bullish, announcing a $1 billion buyback plan earlier this month. There will be ups and downs here, but the giant earnings and cash flow figures are hard to ignore.
Technical Analysis
BLDR had a very steady advance over many months, riding its 10-week line higher until it finally hit a pothole in mid-May. The correction brought shares down to the 40-week line a couple of months later, but support appeared where it “should” and the stock popped back to its old highs.
Granted, volume wasn’t amazing on the bounce, but the dip last week looks normal to us—we’re OK starting a position here and buying more if you see decisive strength through 54. Stop — 44
The Covered Call Trade
Buy Builders FirstSource (BLDR) Stock at 51.30, Sell to Open September 50 Strike Calls (exp. 9/17) for $2.50, or a Net Price of 48.80 or less
Static Return: $120 per covered call (2.45%)
Breakeven: 48.80
Covered Call Return (if assigned): $120 per covered call (2.45%)
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 48.80 or less. (In this case 51.30 minus 2.50 = 48.80. Or another example is you could pay 51 for the stock and sell the call for 2.20, which also equals 48.80.)
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 |
| Dynatrace (DT) | 64.70 | 65.00 | 55.0 | September 65 -- $3.20 | $2.60 |
| ON Semiconductor (ON) | 44.60 | 43.00 | 40.0 | September 46 -- $1.40 | $0.60 |
| Colfax (CFX) | 48.35 | 48.00 | 44.50 | September 50 -- $1 | $0.70 |
The next Cabot Profit Booster issue will be published on August 31, 2021.
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