The stock market was under a bit more selling pressure last week as investors seem to be acting negative, even in response to positive earnings results. Unfortunately, the volatility shook us out of our Coeur Mining (CDE) covered call position. We won’t get every trade right, but that highlights the importance of risk management, especially in turbulent markets. This leads me to this week’s Cabot Profit Booster recommendation from a somewhat more defensive sector.
Cabot Profit Booster 160
The stock market was under a bit more selling pressure last week as investors seem to be acting negative, even in response to positive earnings results. Unfortunately, the volatility shook us out of our Coeur Mining (CDE) covered call position. We won’t get every trade right, but that highlights the importance of risk management, especially in turbulent markets. This leads me to this week’s Cabot Profit Booster recommendation from a somewhat more defensive sector. Here is the stock, and our covered call trade:
The Stock – Aphria Inc. (APHA)
Why the Strength
One sign of the explosive growth underway in the still-young cannabis industry is the recent mega-merger between two of its biggest players. Aphria (based in Ontario) produces medicinal and recreational cannabis products in Canada and internationally and is a primary distributor of medical cannabis to Germany. Its merger with Canada-based Tilray, once completed, will create the world’s largest marijuana company by revenue, with expected annual sales of $685 million; it’ll be in the lead in adult use in Canada and have a bigger position in Germany’s huge medical marijuana market while Tilray will bring a strong position in many European countries, too.
Of course, the big story involves legalization: already legal in Canada, experts see marijuana being either fully legalized across the U.S. (or at least the spread of legalization should continue to grow) over the next two years, with legalization in Mexico looking more likely, too. That will give the combined Aphria a huge opportunity for all sorts of cannabis products, a market estimated to reach $94 billion by 2025.
On the news front, Aphria’s subsidiary, CC Pharma, entered into a strategic agreement with AMP German Cannabis Group that will allow for joint marketing sales of Aphria brand medical weed offerings. The company is growing horizontally as well, with a foray into the U.S. craft beer industry via its acquisition of SweetWater Brewing, one of America’s largest craft breweries by volume.
The plan is to provide a cross-over audience for both companies, as well as provide CBD- or THC-infused beverages to consumers over time. Aphria’s success in growing revenues was seen in the November quarter, when it reported a consensus-beating 33% increase in the top line (up 10% sequentially) to $161 million; net cannabis revenue rose a whopping 99%. Analysts expect a 34% revenue bump in the current quarter (ending February) and big upside ahead. It’s an exciting story.
After peaking at 20 three years ago, APHA slid to a lifetime low of 2 last March, mirroring the long bear phase in the sector. An extended base-building effort followed in the next several months after that low, with shares still in the 4 to 5 area through October. But then came the post-election bump, and after that, the Georgia election buying spree, which catapulted the stock off its 10-week line to new highs near 14 before some recent weakness. Yes, it’s extended, and obviously the market is iffy, but the power here is hard to ignore. We’re OK nibbling here or (preferably) on dips. Stop — 10
The Covered Call Trade
Buy Aphria Inc. (APHA) Stock at 13.25, Sell to Open March 14 Strike Calls (exp. 3/19/21) for $1.40, or a Net Price of 11.85 or less
Static Return: $140 per covered call (11.81%)
Covered Call Return (if assigned): $215 per covered call (18.14%)
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, of 11.85 or less. (In this case 13.25 minus 1.40 = 11.85. Or another example is you could pay 13.50 for the stock and sell the call for 1.65, which also equals 11.85)
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 …
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 February 9, 2021.