I Am Still 'Feeling Lucky' With Smith & Wesson
Here's how a covered call strategy in this gun maker could make your day.
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Today, we are putting Smith & Wesson Brands, Inc. SWBI back in the barrel as a covered call trade. I highlighted this name a couple of quarters ago for this simple option strategy.
A good portion of my holdings in this renowned gun maker, famous for the 357 Magnum used in the Dirty Harry franchise, expired in the money on Friday, as the shares have drifted up a bit since we last looked at this stock.
This is another great feature of the covered call strategy -- it can make solid returns even the underlying stock moves largely sideways.
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The company's migration of its headquarters from Massachusetts to Tennessee has not gone as smooth as hoped over the past few quarters. What move ever goes exactly according to plan? However, Smith & Wesson is largely done with the change and should only see an additional $25 million to $30 million in relocation costs before all of this is in the company's rear-view mirror. It then can benefit from significantly lower operating and potentially regulatory costs going forward.
Outside these costs, management has stated it will deliver $75 million or better of free cash flow over the next year. This will be used to pay off its remaining credit obligations and be debt free 12 months hence.
The company's fiscal year ends at the end of April. While earnings are expected to drop to just over 50 cents this fiscal year compared to 80 cents a share in FY 2023 while Smith & Wesson completes its transition, the company continues to reward its shareholders. Management bumped up its quarterly dividend payout in 2023 and the stock currently yields 3.7%.
The company also bought back over 1% of the outstanding float in its stock in its last completed quarter, whose results were reported in early December.
Fiscal year 2024 will be an inflection year for the company, but shareholders should see clearer sailing after the headquarters move. Analysts project profits will rebound strongly in FY 2025 to nearly a buck a share. That leaves the shares trading at under 14 times next fiscal year's projected earnings and with a free cash yield in the low teens once relocation is complete.
Considering how acrimonious the upcoming election could be and how politically bifurcated the nation has become, I could also see some tailwinds to gun sales heading into November -- although it pains me to say that.
Given all the above, I still feel "lucky" around Smith & Wesson stock and will continue to roll with it via covered call holdings.
Option Strategy
Here is how I am maintaining a position in SWBI using a covered call strategy. Remember, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Selecting the September $12.50 call strikes, fashion a covered call order with a net debit in the $10.90 to $11.30 a share range (net stock price - option premium).
This strategy provides downside protection of just under 15% over the option duration, including the two quarterly dividend payouts. It also provides upside potential of 16%, including dividends over the eight-month option duration even if the stock falls 5% over that time.
At the time of publication, Jensen was long SWBI.
