Up, up and away! The S&P 500 rose 1.52%, the Dow advanced 0.96%, and the Nasdaq climbed 2.82% last week, aided by Federal Reserve Chairman Jerome Powell’s dovish commentary.
There is no doubt this year’s rally has been one of the most impressive rallies market participants have ever seen. More than 50 new closing highs and over 200 trading sessions without a 5% pullback defines the power and consistency of this rally. And as we have all witnessed, the slightest pullback seems to act as a frenzied feeding ground for buyers.
Cabot Profit Booster 190
Before we get into today’s trade idea, I wanted to note that because of the Labor Day holiday, next week’s issue will be published on Wednesday, September 8.
Up, up and away! The S&P 500 rose 1.52%, the Dow advanced 0.96%, and the Nasdaq climbed 2.82% last week, aided by Federal Reserve Chairman Jerome Powell’s dovish commentary.
There is no doubt this year’s rally has been one of the most impressive rallies market participants have ever seen. More than 50 new closing highs and over 200 trading sessions without a 5% pullback defines the power and consistency of this rally. And as we have all witnessed, the slightest pullback seems to act as a frenzied feeding ground for buyers.
I know I sound like a broken record, but I continue to remain steadfast with a “cautiously optimistic” outlook until I see market action demonstrate otherwise.
This week’s pick is a developer and manufacturer of audio products, Sonos (SONO).
The Stock – Sonos (SONO)
Why the Strength
Sonos is a pioneer in wireless home audio – the company began designing its smart speakers before the technology existed for wireless, networked home speakers. Its early focus on the business means it holds one of consumer electronics’ larger portfolio of patents.
That collection appears to have gotten more valuable after a federal judge issued a preliminary ruling this month that Google’s smart speakers infringe on Sonos’ patents for its audio offerings. There’s still a lot of litigating to be done around the claim, but it gave a sharp boost to shares, with Wall Street expecting the end result will be a profitable licensing deal with Google, whose speakers, Pixel phones, tablets and Chromecast streaming device all violate patents, according to the lawsuit.
Don’t mistake Sonos for a patent troll, though: The company competes well with traditional audio businesses like Bose and big tech like Apple – among professional installers, Sonos believes it’s handily the preferred hardware vendor.
The market for smart speakers is still in its early stages, and is getting an additional boost as home theaters continue to extend their popularity from pandemic days. Customers are mainly college-educated, married homeowners, people the company thinks it can sell more product to – most customers, in fact, own four or more Sonos pieces.
Among the firm’s new ideas is a new WiFi picture frame with audio in partnership with IKEA and its own subscription audio service. The pandemic definitely helped business, but Sonos is still crushing estimates (Q3 saw a 12-cent profit vs. expectations of a 52-cent loss!) and more investors are thinking demand trends will remain bullish for a while.
Technical Analysis
SONO hit all-time highs over 43 in the spring as it crested after a fantastic 2020, but fell through support in May and pulled back into the mid-30s.
The stock never really got very bearish, and after testing and holding its 40-week line, found buyers after the Google lawsuit news.
There was a quick dip after the news, but SONO is back near multi-week highs as it works to finish up its base. Stop — 34
The Covered Call Trade
Buy Sonos (SONO) Stock at 39.70, Sell to Open October 40 Strike Calls (exp. 10/15) for $2.10, or a Net Price of 37.60 or less
Static Return: $210 per covered call (5.59%)
Breakeven: 37.60
Covered Call Return (if assigned): $240 per covered call (6.38%)
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 37.60 or less. (In this case 39.70 minus 2.10 = 37.60. Or another example is you could pay 40 for the stock and sell the call for 2.40, which also equals 37.60.)
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 | 68.00 | 55.0 | September 65 -- $3.20 | $3.50 |
| ON Semiconductor (ON) | 44.60 | 44.70 | 40.0 | September 46 -- $1.40 | $0.80 |
| Colfax (CFX) | 48.35 | 48.50 | 44.50 | September 50 -- $1 | $0.70 |
| Builders FirstSource (BLDR) | 50.60 | 54.00 | 44.0 | September 50 -- $2.20 | $4.20 |
The next Cabot Profit Booster issue will be published on September 8, 2021.
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