Market Overview
This week could be a doozy for the market as traders are eagerly awaiting the “big” Federal Reserve announcement on Wednesday, as well as a monster week of earnings reports, and the January Jobs Report on Friday. Buckle up!
The Stock – On Holding (ONON)
Why the Strength
On has a great story of innovation when it comes to shoes—the Swiss firm’s offerings give runners (and, increasingly, many other athletes, including tennis players) more support, a softer cushion when landing and a bit more “spring” when pushing off the ground. That and natural expansion into things like trail running, hiking and even apparel, as well as premium pricing ($130 to $180 for a pair), has helped the firm take market share in a big way.
From its founding in 2010, On likely cranked out $1.25 billion in revenue last year with rapid growth still in place. However, there’s upside beyond that, as On could be the next Lululemon in a sense: While the products are different, the company is benefiting from its offerings being adopted for everyday use because of both comfort and style, similar to how Lululemon’s yoga wear was a big factor in the adoption of athleisure apparel. It’s hard to quantify, but it’s easy to see if you look around higher-end areas, and usually once these trends are in effect for a new brand, they continue for many years assuming management makes the right moves.
Back to the business, things were actually hampered a bit early last year because of supply chain issues, but that’s in the past and, while there hasn’t been any official pre-announcement, the top brass sounded an optimistic tone on demand trends in an early-January conference. The bottom line has been in the black for a while, and analysts see the top line lifting 35% or so this year while earnings leap 27%, both of which are likely conservative. Granted, the valuation is up there, but On has the potential to be one of the next big, high-end consumer brands.
Technical Analysis
ONON came public in late 2021, spiked a few weeks later and then had a giant post-IPO selloff as the bear market crushed valuations—shares dipped from above 50 to around 16 in March and again in May. Interestingly, though, that was effectively the bottom, with multiple retests and holds of the 16 area in the months that followed, and ONON has been pushing higher on good volume since the year flipped, capturing its 40-week line and continuing higher. Stop - 19
The Covered Call Trade
Buy On Holding (ONON) Stock at 23.25, Sell to Open February 22.5 Strike Calls (exp. 2/17) for $1.35, or a Net Price of 21.9 or less
Static Return: $60 per covered call (2.73%)
Breakeven: 21.9
Covered Call Return (if assigned): $60 per covered call (2.73%)
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 21.9 or less. (In this case 23.25 minus 1.35 = 21.9. Or another example is you could pay 23.5 for the stock and sell the call for 1.60, which also equals 21.9)
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 February 7, 2023.
