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Profit Booster
Make Money 3 Ways from Great Growth Stocks

Cabot Profit Booster 174

The Cabot Profit Booster portfolio continues to be in the right stocks, even as sector rotation intensifies and countless stocks have come under intense selling pressure. This is a great situation, and sparked a great question from a CPB subscriber:

Cabot Profit Booster 174

The Cabot Profit Booster portfolio continues to be in the right stocks, even as sector rotation intensifies and countless stocks have come under intense selling pressure. This is a great situation, and sparked a great question from a CPB subscriber:

CPB Subscriber: I am definitely not complaining about MTDR!! Just curious: What stood out on this stock? I would appreciate it if you could take me through your thought process on why you picked MTDR vs. the field. As always, love your work, just trying to get a feel for the service.

Jacob: To be honest, my process isn’t particularly complicated.

First off, I obviously lean on Mike Cintolo for the stock picks. He is terrific at finding the right stock chart, and stock story.

Then, I look to the options market to get a read on bullish/bearish option activity in stocks from Mike’s list that I’m targeting. If the option activity is bullish, that stock is a contender to buy.

And finally, I try to keep the portfolio as diversified as possible, in the strongest of sectors, as well as a healthy premium opportunity to sell via the call option.

In this case we didn’t have any energy exposure, and the sector was coming alive, so MTDR was the pick.

This brings me to this week’s stock, which was a big earnings winner last week, though given market conditions we are going to play it defensively by selling an at-the-money call:

The Stock – Funko (FNKO)
Why the Strength

Funko excels at feeding fandom. It’s best known for its POP! series of figurines, four-inch tall plastic models with large heads and big eyes that are usually caricatures of fictional (like Harry Potter and Ronald McDonald) and real celebrities.

With 900 licensed lines including Disney’s big brands, the major sports leagues, video game publishers and global movie studios, Funko has something to appeal to seemingly anyone, young to old or serious collectors to impulse buyers. It’s also not terribly reliant on any one licensee, with none accounting for more than 6% of sales.

The pandemic has been a boon for the entire collectibles industry and Funko has participated—in Q1 (usually weak following the holidays), the company saw sales growth accelerate in a big way to 38%, while margins expanded as well, driving the bottom line to 24 cents per share, up from a loss a year ago and a huge 13 cents above expectations.

Figures are 80% of Funko sales and they continue to be popular, with revenues up 35% in the quarter. Even better in the eyes of investors is the possibility of Funko expanding further outside figurines to things like games and soft goods like backpacks and T-shirts. The latter piece of the business performed even better, led by its Loungefly apparel business, which saw an 82% surge in sales.

And then there’s the new NFT craze (non-fungible tokens, i.e. digital, blockchain-based limited rights to unique images and video clips), which Funko bought into this April by acquiring TokenWave, a leading platform for organizing and tracking NFTs. (Funko will start selling unique NFTs through that platform next month.) Analysts see earnings more than doubling this year.

Technical Analysis
FNKO had been a low-priced, speculative name for most of its life (IPO in late 2017), but it changed character with many stocks last November. The buying was solid, with shares reaching 14 in January before a little rest. Then came a wave of buying in March when NFT rumors were floated; that buying didn’t last long, but FNKO held firm and, after tightening up for a bit, exploded following Q1 earnings last Thursday. Stop — 19

CPB_Weekly-Issue_05-11-21_FNKO

The Covered Call Trade
Buy Funko (FNKO) Stock at 22.50, Sell to Open June 22.5 Strike Calls (exp. 6/18) for $1.50, or a Net Price of 21 or less

Static Return: $150 per covered call (7.14%)

Breakeven: 21

Covered Call Return (if assigned): $150 per covered call (7.14%)

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 21 or less. (In this case 22.5 minus 1.50 = 21. Or another example is you could pay 22 for the stock and sell the call for 1, which also equals 21)

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 SymbolPrice BoughtCurrent Stock PriceStopOption - Price of Call SoldCurrent Option Price
Cleveland-Cliffs (CLF)18.5521.2516.0May 20-- $1.40$1.85
Goodyear Tire & Rubber (GT) 17.4019.0514.5May 18 -- $0.70$1.20
Levi Strauss (LEVI)28.3029.4023.5May 29 -- $0.75$0.90
Harley-Davidson (HOG)48.8547.8040.5May 49 -- $1.80$0.80
Matador Resources (MTDR)26.0027.6522.0May 27.5 -- $0.90$1.30

The next Cabot Profit Booster issue will be published on May 18, 2021.