There is no sugarcoating it, the market had a very bad week as the S&P 500 fell 2.5%, the Dow lost 2.14% and the Nasdaq declined by 2.6%.
This week there are a handful of important earnings reports, a Federal Reserve meeting, the October Jobs Report, and much more. Buckle up!
The Stock – Ollie’s Bargain Outlet (OLLI)
Why the Strength
We’ve written up Ollie’s a couple of other times this year, as the firm’s been in the midst of a fundamental turnaround and the stock acts like it wants to go higher if the market lets it (see more on that below).
To recap, the firm’s motto is Good Stuff Cheap, which basically explains the business—it’s the largest closeout retailer out there with 500 or so locations, offering brand-name goods at 20% to 70% below retail prices in tons of categories, which is obviously a boon to consumers. But Ollie’s is also a key player for retailers, giving them an outlet for inventory management and closeout merchandise, with the top brass here seeing a growing availability of deals as the environment gets more uncertain and as the firm deepens its relationships with big brands.
A slew of hiccups from the pandemic and other things hurt results for a while, but now business is cranking ahead and margins look to be getting back to their historical norms: The July quarter not only saw overall sales rise 14%, but same-store sales lifted a strong 7.9% while EBITDA margins boomed to 12.9%, more than double last year’s figures; further “catch-up” in those margins should keep big investors interested. But there’s more than that—Ollie’s has always had a great cookie-cutter story, ending July with 482 locations, it expects to open 23 in the October quarter alone and it usually expands the store count by double-digit percentage totals, with a long-term goal of 1,050 stores (which itself could be conservative).
It’s not going to grow at 50% clips, but Ollie’s story looks to be back on track after a couple of years in the wilderness, resulting in steady, reliable growth for a long time to come.
Technical Analysis
We wrote up OLLI at the start of the month, with the stock knocking on the door of new recovery highs—we wanted to enter on a breakout, but that didn’t happen, so there was no trade. The setup nearly a month later isn’t quite as pristine, but given the market’s implosion, it’s pretty solid: OLLI reached a new relative performance line peak last Friday and on Monday and is just a couple of points below some resistance. Stop – 70.5
The Covered Call Trade
Buy Ollie’s Bargain Outlet (OLLI) Stock at 76.5, Sell to Open December 75 Strike Calls (exp. 12/15) for $5.80, or a Net Price of 70.7 or less
Static Return: $430 per covered call (6.08%)
Breakeven: 70.7
Covered Call Return (if assigned): $430 per covered call (6.08%)
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 70.7 or less. (In this case 76.5 minus 5.80 = 70.7. Or another example is you could pay 76.75 for the stock and sell the call for 6.05, which also equals 70.7)
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 November 7, 2023.
