Last week the major indices pulled back in a meaningful way. The S&P 500 lost 2.20%, the Dow declined 1.36%, and the Nasdaq pulled back 3.20%.
The benchmark index sank 4.8% in September, marking its worst month since March 2020. It was also the first losing month for the S&P after seven straight months of gains. The outlook didn’t look much brighter Monday as the market saw another bout of losses.
Cabot Profit Booster 195
Last week the major indices pulled back in a meaningful way. The S&P 500 lost 2.20%, the Dow declined 1.36%, and the Nasdaq pulled back 3.20%.
The benchmark index sank 4.8% in September, marking its worst month since March 2020. It was also the first losing month for the S&P after seven straight months of gains. The outlook didn’t look much brighter Monday as the market saw another bout of losses.
But even with all the doom and gloom the headlines are touting, we must remember to put the pullback into perspective. The S&P 500 (SPY) was trading at 321.50 right before Covid entered the fray; now the highly liquid benchmark ETF trades at 428.50, over 30% higher. So, after such a stark and steady advance, a pullback shouldn’t be terribly surprising.
As I’ve stated over the past few weeks, I will continue to allow the market to dictate when it makes sense to shift gears. Until then, I remain “cautiously optimistic” and will trade accordingly. So, once again, because of recent market weakness, for the third straight week I’m going to play it safe by selling in-the-money calls.
This week’s pick is multinational gambling company International Game Technology (IGT).
The Stock – International Game Technology (IGT)
Why the Strength
Casino gambling has staged a huge comeback in 2021, with top gaming state Nevada boasting record gambling levels this summer despite subdued convention bookings.
International Game is a big player in this market, producing video slot machines and other gambling technology. Aside from video slots, the firm has a lottery business (which helped it navigate last year’s casino shutdowns) and, importantly, a sports betting platform that powers 50 sportsbooks across 15 U.S. states.
This year’s reopening contributed to strong performance in all segments, including lottery, land-based gaming and digital and sports betting activities, all of which drove revenues to an estimate-beating $1.04 billion in Q2, up 74% from a year ago. Broad-based player demand across games and channels drove same-store sales 35% higher in the quarter, driven by lottery growth (up 50%) and new additions to this category.
Impressively, while accounting earnings are in the red, the company generated $380 million in free cash flow in the first half of 2021—about $1.85 per share and the highest amount for a first half in company history. The company sees global same-store sales up mid-single digits in the second half of 2021 and up low double digits compared to the pre-pandemic second half of 2019. Management also expects to exceed 2019 levels in several key metrics this year, thanks in part to the high-level performance of its lottery business and “progressive recovery” in global gaming.
Wall Street sees the firm’s revenue rising 29% for the full year, with one analyst recently hiking his price target.
Technical Analysis
IGT rallied to 19 in January, etched a nice-looking four-month base and staged a breakout in May. But the market caused that move to fail, leading to another, deeper (35% deep) correction that briefly took shares below the 40-week line.
The initial recovery was just OK, but the roof has blown clean off the past two weeks, with the stock powering to new highs on two straight weeks of good volume. Stop — 22.50
The Covered Call Trade
Buy International Game Technology (IGT) Stock at 28, Sell to Open November 26 Strike Calls (exp. 11/19) for $3.00, or a Net Price of 25.00 or less
Static Return: $100 per covered call (4.00%)
Breakeven: 25.00
Covered Call Return (if assigned): $100 per covered call (4.00%)
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 25.00 or less. (In this case 28 minus 3.00 = 25. Or another example is you could pay 29 for the stock and sell the call for 4.00, which also equals 25.)
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 |
| PureStorage (PSTG) | 26.65 | 25.00 | 22.5 | October 27 -- $1.00 | $0.15 |
| Cloudflare (NET) | 129.00 | 119.00 | 108.0 | October 126 -- $7.70 | $1.50 |
| Snap (SNAP) | 75.00 | 72.00 | 69.0 | October 75 -- $3.30 | $1.50 |
The next Cabot Profit Booster issue will be published on October 12, 2021.
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