Editor’s note: This piece from Bryan Perry is the inaugural column in our new “Best Stocks to Buy” series, in which InvestorPlace experts provide quick takes on stocks that look like good buys now.
SunPower (SPWR) is one of my favorite companies in the solar energy sector. It’s been in a nice uptrend for the past year with a couple bouts of constructive consolidation along the way. And it’s setting up again as a nice trade right now.
Solar is a more speculative area of the market, so those stocks came in aggressively starting in March along with the rest of the high-beta stocks in the Nasdaq. But then in June, solar got a lot of positive press surrounding Warren Buffett’s statement that he intended to double his exposure in solar by $15 billion. Since then, solar has been resuming its uptrend; as measured by the Market Vectors Solar Energy ETF (KWT), the group is now up 50% for the past year despite the previous volatility.
SPWR itself enjoyed a major technical upside breakout in mid-June, clearing $36 then rising to hit $42.07 before backing-and-filling to $37 in early July. With SPWR shares currently trading just below $38, the chart looks very constructive — and earnings should be just outstanding if last quarter’s outlook is any guide. SunPower said that it expects to report Q2 GAAP revenues of $500 million-$550 million in its July 31 earnings announcement.
Solar shares are volatile, as I’ve mentioned, but they offer tremendous upside opportunity — which makes them perfect for one of my preferred trading strategies: the short-term covered call, also known as a “buy-write.” Here’s how I recommend you trade SPWR using an August call option.
For every 100 shares of SunPower (SPWR) you own or purchase at market, use a limit order to “sell to open” 1 SPWR Aug. $39 call for a net debit of $36.35 or less.
For example: SPWR shares are trading around $38, and the SPWR Aug. $39 calls are trading around $1.65 per contract. Subtracting the targeted call premium you could collect from that stock price ($38 – $1.65) would result in a net debit of $36.35 from buying the shares and selling calls against them at this level.
A sale of five calls at their current $1.65 price brings in $825 of upfront income. Then from here, the goal is to hold SPWR shares through August options expiration. I fully expect the stock to be trading north of $39 by then; if it is, the buyer of your SPWR Aug. $39 calls will want to “call away” your shares. (In other words, he or she will be purchasing SPWR shares from you at $39, for a slight discount to their market value.)
If all goes as planned and your SPWR shares are called away, your net profit will be $2.65 per share ($39 – $36.35 = $2.65), which translates to a 7.0% gain. Not bad for a three-week hold.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income, which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and 4x greater income.
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