Market Overview
A couple housekeeping items before we dive into this week’s stock and covered call idea.
First, next Tuesday, November 29, coming out of the Thanksgiving weekend we will not publish a Profit Booster issue. Have a fantastic Thanksgiving!
Second, Cameco (CCJ) closed below our November strike price last Friday, which means the option we had sold expired worthless. Today, we are going to continue to sell calls against our stock holding. Here is the trade:
Sell to Open the CCJ December 25 Call (exp. 12/16/2022).
Speaking of last Friday’s expiration, here are the profits from the November expiration cycle:
ASO – Profit of $272, or a yield of 5.92%
LVS – Profit of $183, or a yield of 4.83%
DVN – Profit of $200, or a yield of 3.05%
WING – Profit of $1,185, or a yield of 10%
SRPT – Profit of $513, or a yield of 5.4%
STLD – Profit of $444, or a yield of 4.9%
WWE – Profit of $335, or a yield of 4.67%.
Today we are going to keep the profits rolling by selling a defensive covered call in a recent earnings winner.
The Stock – Shoals (SHLS)
Why the Strength
Shoals looks like an emerging arms supplier in the solar wars: It’s the leading provider (more than twice the size of its nearest competitor) of what are called electrical balance of system (EBOS) products, which are the endless boxes, cable assemblies, fuses, monitors and more that are needed to gather, regulate and transfer the energy collected from the actual solar panels—it’s needed on every single solar project, so it’s obviously a big deal.
The products themselves aren’t anything special, which is the one worry here, whether this is basically a commodity-like business that will see margins tank and competition soar. But Shoals has a couple of advantages beyond its size, the most important of which is its installation methods—installation costs are a big factor (can be 6% of the overall project cost), but Shoals has developed a better way with more above-ground activity, far less wire runs and doesn’t require licensed electricians, slashing costs by 20% to 40%, and leading to more custom solutions (which include some proprietary products) for clients. Plus, EBOS is a key factor in EV charging stations (more than half the cost of an EV station is EBOS!) and battery storage systems, too.
Shoals’ numbers were a bit lumpy as the sector had some early-year uncertainty, but the future is clearly bright: Q3 saw sales (up 52%, a big acceleration from recent quarters) and earnings (up 42%) top expectations, while EBITDA rose 57% and, more important, the backlog actually grew by 74%—analysts see sales up north of 50% next year while earnings more than double, and even that’s likely to prove conservative as the green energy bill gave the sector a lot of certainty. We like it.
Technical Analysis
SHLS was crushed early in the year, but had a very nice run in the summer after Congress threw a lot of money at the sector. The correction after that was sharp but not unreasonable (34% deep), and the real action came late last week, when the stock catapulted ahead after the quarterly report—SHLS ended up tagging its highest level since last November on its heaviest weekly volume since the second week it was public (February 2021). It’s going to be super volatile, but we’re not opposed to a nibble here. Stop – 24
The Covered Call Trade
Buy Shoals (SHLS) Stock at 30, Sell to Open January 30 Strike Calls (exp. 1/20/2023) for $3, or a Net Price of 27 or less.
Static Return: $300 per covered call (11.11%)
Breakeven: 27
Covered Call Return (if assigned): $300 per covered call (11.11%)
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 or less. (In this case 30 minus 3 = 27. Or another example is you could pay 29.5 for the stock and sell the call for 2.50, which also equals 27)
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 December 6, 2022.
