The three leading indexes pushed higher this past week as the S&P 500 rose 0.78%, the Dow gained 1.22%, and the Nasdaq added 0.08%.
Following a choppy and volatile start to the week, on Thursday politicians kicked the debt-ceiling can down the road, which seemed to make investors happy, at least for the day. Unfortunately, that investor excitement was short-lived as the September jobs report on Friday came in at 194,000 new jobs added, well under the expectation of 500,000. The market managed to close Friday only slightly lower despite the bad news.
Cabot Profit Booster 196
The three leading indexes pushed higher this past week as the S&P 500 rose 0.78%, the Dow gained 1.22%, and the Nasdaq added 0.08%.
Following a choppy and volatile start to the week, on Thursday politicians kicked the debt-ceiling can down the road, which seemed to make investors happy, at least for the day. Unfortunately, that investor excitement was short-lived as the September jobs report on Friday came in at 194,000 new jobs added, well under the expectation of 500,000. The market managed to close Friday only slightly lower despite the bad news.
The pullback continued Monday as inflation and supply-chain concerns were at the forefront. And now earnings season is upon us with the big banks due to announce this week starting with JP Morgan (JPM) at the opening bell Wednesday. The next few weeks could give us some insight into what we should expect heading into the end of the year.
Finally, this week is expiration of three of our October covered call positions. Expect to hear from me Thursday afternoon or Friday morning on how we will manage these positions.
This week’s pick is manufacturer and supplier of building materials Builders FirstSource (BLDR).
The Stock – Builders FirstSource (BLDR)
Why the Strength
Rising interest rates have been an on-again, off-again thorn in the market’s side for the past few months, and not surprisingly, many construction- and building-related stocks have slacked off partly as a result. But Builders FirstSource has been a glaring exception, which bodes well.
As we wrote in late August, the company is one of the key cogs in the housing market: It’s the largest supplier of structural building products for new residential construction, repair and remodeling—the inflation in so many goods is helping results this year (hence why analysts see earnings exploding this year but falling back some next year), though longer term, the firm’s move into higher-margin value-added products has led to steadily advancing earnings for years. (About 40% of revenue is still commodity-based as of Q2.)
The other angle to this story is M&A, with many good-sized buyouts expanding the firm’s offerings; it took over the largest building supplier in Arizona a few weeks back, while early September brought California’s biggest Truss manufacturer into the fold.
All in, business has been exploding and crushing estimates this year (see table below), and impressively, analysts are racing to keep up—this year’s earnings outlook has improved from $4.52 to $6.39 during the past two months, while next year’s figure has moved from $3.66 to $4.52 over the same time, and the odds are that both will move nicely higher as the next quarterly report (likely out in early November) is released.
It’s not changing the world, but if you believe the housing market will remain in good shape, Builders FirstSource should thrive.
Technical Analysis
As investors caught on to BLDR’s bottom line exploding both last year (up around 50%) and again this year (up another 100% on top of that), the stock made a huge, relatively persistent move to 54 in May.
The correction that followed wasn’t too painful, and the rally off the 40-week line was just as you’d draw it up. Just as encouraging is the last few weeks of action, with calm action, little big-volume selling and support at the 10-week line—and last week, shares popped right back to their old highs. If you don’t own any, you could grab some here with a stop under 50. Stop—49
The Covered Call Trade
Buy Builders FirstSource (BLDR) Stock at 56, Sell to Open November 55 Strike Calls (exp. 11/19) for $3.00 or a Net Price of 53.00 or less
Static Return: $200 per covered call (3.77%)
Breakeven: 53.00
Covered Call Return (if assigned): $200 per covered call (3.77%)
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 53 or less. (In this case 56 minus 3.00 = 53. Or another example is you could pay 55.50 for the stock and sell the call for 2.50, which also equals 53.)
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 |
| PureStorage (PSTG) | 26.65 | 25.50 | 22.5 | October 27 -- $1.00 | $0.05 |
| Cloudflare (NET) | 129.00 | 147.00 | 108.0 | October 126 -- $7.70 | $21.00 |
| Snap (SNAP) | 75.00 | 75.00 | 69.0 | October 75 -- $3.30 | $1.20 |
| International Game Technology (IGT) | 28.10 | 29.00 | 22.5 | November 26 -- 3.50 | $4.00 |
The next Cabot Profit Booster issue will be published on October 19, 2021.
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Chief Investment Strategist: Timothy Lutts
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