Top Trade Alert – July 28th, 2022 – WBA and BIG


    From this morning’s Report:  

    I was reminded this morning, WBA is still under $40, which is $34Bn and the company makes about $4Bn a year so not even 9 times earnings to buy Walgreens-Boots.

    We just reviewed their Earnings Presentation this morning in our Live Chat Room and I can’t believe the negativity on this place where 67M people were vaccinated since last year.  ALL those people came to the store.  If they each spent $10 while they were there, that’s $670M of retail business and earnings were indeed up 13.9% from last year.

    I guess people think Covid is “over” but it’s not by a long shot and we will be needing boosters for years to come.  Other than our Money Talk Portfolio, we had cashed in our WBA positions so now is a good time to add them back.

    For our Long-Term Portfolio, let’s:

        • Sell 10 WBA 2024 $40 puts for $6 ($6,000) 
        • Buy 25 WBA 2024 $35 calls for $6.80 ($17,000)
        • Sell 25 WBA 2024 $45 calls for $2.35 ($5,875) 

    That’s net $5,125 on the $25,000 spread that’s half in the money to start.  To the downside, we risk being assigned 1,000 shares at $40 and, if we lose the $5,125 entirely, our net cost of 1,000 shares would be $45.125 per share.  On the other hand, we are starting out half in the money on a $25,000 spread with $19,875 (387%) upside potential in 18 months.

    In reality, we’re going to be thrilled to buy more if WBA goes lower and the puts can be rolled to 2025 $35 puts when they come out.  Having 25 spreads also paves the way for us to sell short calls while we wait.  The October $40s, for example, are $1.60 for 85 days (and we have 540 days to sell) so just selling 10 of those for $1,600 gives us 32% of our cash outlay back – but we’re too optimistic to do that just yet. 

    That brings us back to our final laggard, Big Lots (BIG) and boy do people not understand their model.  Like any Retailer, BIG is dealing with cost pressures in gross margins due to freight and inventory shrink (theft) while operating costs are heightened due to supply chain inflation and labor inflation (increasing wages to store employees).

    BUT, when you hear about stores like TGT and WMT taking hits as they seek to rebalance their inventory – think about Big Lots scooping that inventory up at low prices and then selling it to discount shoppers. 

    BIG generates $4.4M per location vs $2-3M at Dollar Tree or Dollar General yet BIG has a Market Cap of just $565M at $19.50 with $5.7Bn in sales and they made $178M last year (this year probably even).  DLTR is valued at $36Bn with $1.8Bn (20x) in profits on $28Bn in sales and DG is valued at $55.5Bn with $2.5Bn in profits (20x) on $37Bn in sales. 

    Big has 1,400 stores vs 8,000 for DLTR and 18,000 for DG so it’s got plenty of room to grow and that’s how we look at it – as a long-term investment.  The company has authorized $160M to buy back it’s own stock – 1/3 of it if they spend it at this price!  

    We already have BIG in our Long-Term Portfolio and, at this point, we’re going to buy back the 20 short 2024 $55 calls for 0.35 ($700) and roll our 40 2024 $30 calls at $2.40 ($9,600) to 60 of the 2024 $15 ($6.50)/30 ($2.40) bull call spreads at net $4.10 ($24,600) and, after earnings, we’ll see about selling some short calls (we already sold short puts).  

    Our original net was $5,620 and now we’re spending net $15,700 to end up with 60 of the 2024 $15/30 spreads ($90,000 potential) that are $24,000 in the money with 10 2024 $30 puts.  In April , we had rolled for $8,000 and doubled down for $14,500 for a total net of $43,820 so, at $30, our potential gain is now $46,180 (105%) despite BIG being down 50% from our initial entry in October of last year.  

    As a new trade on BIG for our Earnings Portfolio, let’s:  

        • Sell 10 BIG 2024 $20 puts for $6 ($6,000) 
        • Buy 20 BIG 2024 $20 calls for $4.80 ($9,600) 
        • Sell 20 BIG $2024 $30 calls for $2.40 ($4,800) 

    That’s a net credit of $1,200 so our worst-case is owning 1,000 shares of BIG for net $18.80 ($18,800).  The upside potential at $30 is $20,000 and anything over $19 is a profit.  Don’t you just love options?!?