Market Overview
Despite ongoing banking fears, impressively the S&P 500 gained 1.26% last week, while the Dow rose by 1.48% and the Nasdaq added 1.14%. How this situation will play out this week is a complete toss-up, though I have to say I’ve been impressed by the resiliency of the bulls in the face of bad news … for now!
Of note, we have had two positions (AAL and RIG) that have been dancing marginally below and above our stops for the past several weeks. For now, I am going to give these trades a bit more rope, though if market conditions deteriorate, we will sell.
The Stock – On Holding (ONON)
Why the Strength
There are never any sure things in the market, and that goes double in this uncertain environment, but On Holding certainly quacks like a new leader should the bulls reassert control.
On is based in Switzerland, and it got its start by people who wanted to truly develop a better running shoe—and by most accounts, they did, with a more cushion-y bottom when landing but also offering more spring when pushing off. In recent years, they’ve branched out into more sports (including tennis, where Rodger Federer modeled a shoe he liked, as well as trail running and more) and even apparel. That’s important and got the firm off to a good start, but like Lululemon and some other outfits, On has become something of a lifestyle brand, where sort-of-athletes buy their expensive wares (usually $150 or more) simply for their comfort and style.
Whatever the reason, business is extremely hot: In Q4, reported last week, local currency sales lifted 92% overall, including sales up 80%-plus in every region around the world, not to mention a 104% gain in wholesale revenue and a 76% boom in direct-to-consumer sales—all while margins held up as management said it avoided most discounting around the holidays. Guidance for 2023 (revenues up around 40%) was also better than expected, with the early 2022 supply chain issues clearly in the past, and all of that caused a frenzy of buying—interestingly, Fidelity Contrafund owned 8.3 million shares (about 1.3% of the company) as of year-end, and clearly some big investors piled in last week.
There have been many athletic footwear/athletic gear winners (Crocs, LA Gear, Reebok, Nike, Under Armour) over time, and On Holding could be the next one in line if management continues to pull the right levers.
Technical Analysis
ONON is looking pretty classic on its chart, with an IPO, a huge downtrend, and then support appearing that spring in the 16 area—and that 16 area held many times through year-end. The early 2023 rally was decent, with a choppy six-week pullback alongside the market holding above the 40-week line. Then came last week, which sent shares into orbit on four days of overwhelming buying volume. Stop — 24
The Covered Call Trade
Buy ON Holding (ONON) Stock at 30, Sell to Open May 30 Strike Calls (exp. 5/19) for $2.50, or a Net Price of 27.5 or less
Static Return: $250 per covered call (9.09%)
Breakeven: 27.5
Covered Call Return (if assigned): $250 per covered call (9.09%)
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 27.5 or less. (In this case 30 minus 2.50 = 27.5. Or another example is you could pay 29.8 for the stock and sell the call for 2.30, which also equals 27.5)
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 April 4, 2023.
