2022 went out with a whimper for the market as the indexes posted one of their worst years on record. The numbers aren’t pretty as the S&P 500 fell 19.4%, the Dow lost 8.8%, and the Nasdaq was the worst performer, having fallen 33.1%.
Hopefully the new year will bring better results for the market, though in case more selling pressure is coming, today we are again going to execute a defensive covered call.
The Stock – Las Vegas Sands (LVS)
Why the Strength
Las Vegas Sands is a leader in developing integrated resorts, which combine luxury accommodation with gambling, entertainment, retail and convention space. While Sands is famous for its Las Vegas Strip properties, those have been sold, with Macau (five resort properties) and Singapore (one huge operation that cranks out big cash flow) what will drive the business going forward.
Regulators just renewed Sands’ 10-year gaming concession to operate in Macau, removing a chunk of uncertainty for investors (and a reason for the stock’s strength). More importantly, as China emerges from its Covid lockdowns and Macau gradually opens up to foreign travelers, gambling tourism to the region is expected to stage a comeback.
On that score, a big Wall Street bank just noted China took its Covid-related travel history tracking system offline, which should pave the way for a 2023 Macau travel revival and singled out Sands as a major recovery play. Sands is doubling down on the region, recently unveiling a plan to invest nearly $4 billion on capital and operating projects through 2032, including $3.5 billion in non-gaming projects to appeal to international travelers.
Sands’ Q3 report wasn’t great, as travel restrictions hit its Macau properties especially hard. While total revenue of $1 billion was up 17% from a year ago, it missed estimates, and the firm reported a per-share loss of 27 cents. Singapore was a bright spot for Sands, however, with that region contributing $343 million in EBITDA (versus a negative $152 million in Macau). But this all happened with travel to these regions down 50% to 90%, so as people return, cash flow should go through the roof. We like it.
LVS hit a pre-pandemic peak of 74 back in early 2020 before disaster struck. Covid lockdowns in China took a major toll on the stock, sending it tumbling to 29 where it bottomed last May. LVS was choppy after that, with a recovery into October falling flat, but since that low near Halloween, shares have acted great. The 50 area has provide some round-number resistance, so we’ll set our buy range down a bit. Stop – 41
The Covered Call Trade
Buy Las Vegas Sands (LVS) Stock at 50.5, Sell to Open February 48 Strike Calls (exp. 2/17) for $4.50, or a Net Price of 46 or less
Static Return: $200 per covered call (4.34%)
Covered Call Return (if assigned): $200 per covered call (4.34%)
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 46 or less. (In this case 50.5 minus 4.50 = 46. Or another example is you could pay 50 for the stock and sell the call for 4, which also equals 46)
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 …
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 10, 2023.