The three leading indexes again made a run at new highs last week as the S&P 500 gained 1.75%, the Dow rallied 0.7% and the Nasdaq added 2.88%.
This week is the expiration of our three January positions. I will update where we stand on each on Friday.
The Stock – Flex (FLEX)
Why the Strength
Flex is a leading global electronics manufacturing and logistics solutions provider, offering components, circuit board fabrication, design and engineering services to some of the world’s biggest companies at one of the industry’s lowest price points.
The company operates in two segments, Reliability and Agility, with the former segment focused on automotive, industrial and health solutions, while the latter unit is devoted to consumer devices, cloud network infrastructure and premium household/lifestyle brands. (Flex’s third segment, the Nextracker solar business, was recently fully spun off after that firm’s IPO about a year ago.)
As the post-Covid global supply chain continues to be repositioned while manufacturing capacity expands, Flex has benefited from these trends in the form of strong backlog and customer wins across multiple industries and continents. In its fiscal Q2 (ended September 29), revenue of $7.5 billion came in 4% lower (due to a strong comparison from last year’s Q2), but earnings of 68 cents beat estimates by 17%. Revenue growth in Flex’s automotive business outpaced the industry, while the cloud business also outperformed and is expected to grow 20% per year, driven by demand for generative artificial intelligence items.
Cloud is where Flex plans to place an increasing focus, along with digital health and next-gen mobility (electric and autonomous vehicles and EV charging). Flex foresees eye-popping 50% compound annual growth in the mobility business and 10% growth in digital health, driven by “smarter and smaller” devices for drug delivery.
Management guided for fiscal 2024 earnings (ending in March) to grow 8%, with Wall Street eyeing a sizable bottom-line acceleration in the next couple of years. The fiscal Q3 report is due out January 31 (post-market).
Technical Analysis
FLEX actually got going in the second half of 2022, with pullbacks to the 40-week line in late 2022 (near 12), April/May 2023 (just above 14) and again last October and December (at 17 and 18, respectively), finding support after multi-month rest periods. But after the December dip, we see FLEX moving up impressively, with the stock rallying five weeks in a row on plenty of big volume despite some occasional market hiccups during that time. Stop — 20
The Covered Call Trade
Buy Flex (FLEX) Stock at 22.5, Sell to Open February 22 Strike Calls (exp. 2/16) for $1, or a Net Price of 21.50 or less
Static Return: $50 per covered call (2.32%)
Breakeven: 21.50
Covered Call Return (if assigned): $50 per covered call (2.32%)
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 21.50 or less. (In this case 22.5 minus 1 = 21.50. Or another example is you could pay 22.25 for the stock and sell the call for 0.75, which also equals 21.50)
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.
The next Cabot Profit Booster issue will be published on January 23, 2024.
