Newell Brands: Long And Writing Covered Calls After Recent Run-Up
Summary
- I have been long Newell Brands for some time, taking advantage of the nice dividend yield and the turnaround program.
- After running up into the mid-20s, the "COVID-19 Collapse" was brutal to the stock price, cutting it in more than half.
- I added some shares with a "buy-write", not expecting the recent jump.
- Friday, I rolled out the "buy-write" calls at a small credit and wrote slightly out of the money covered calls on the remaining long-term shares.
Newell Brands (NASDAQ:NWL) is a mainly consumer-goods conglomerate with smaller commercial products lines business as well. I've previously written on Newell Brands, both analyzing the company's prospects as it attempted to recover from some ill-advised growth which resulted in too much debt and also how I was writing covered calls on my position to increase returns. I was holding a position in Newell Brands in March when the market tumbled. Like many investors, the rapid drop across the market and, especially, in certain stocks caught me by surprise. As my stock account was heavily invested in REITs along with Newell Brands, I suffered great losses. Newell Brands fell from a 52-week high hit last fall of nearly $21 a share to a low around $10.50 by March 23rd.
First, Stop the Bleeding
When the share price rallied to $14 a share (slightly above my base as I had previously written covered calls which had expired), I sold 1/3 of my position and all the reinvested dividends. I mainly did this to increase the size of a REIT position in a "best in class" performer that was trading at a valuation and yield it hadn't hit in many years. I wasn't overly pessimistic about Newell Brands, as I think long term, their core products and the turnaround plan are still intact. This sale closed on 4/28. Little did I know that merely days later, the stock would drop over 10%. I wasn't looking to try to "range trade" the stock but was able to buy back the core position by early May.
Buy-Writing, Or How To Get An Immediate "Dividend"?
Since I had sold part of my position at $14; when I bought it back, I checked out the $14 calls. The share price had only been above $14 a few days since the March drop, and I looked at this scenario: Buy back the shares in a round lot at $12.40, write the June $14 calls at a premium of $.30, and possibly get $1.90 in capital gain in about a month and a half if called out. Additionally, I would hold the shares through a quarterly dividend - at a very attractive yield. I also reasoned that the long-term shares would still be held without calls written against them, so why not do a "buy-write" instead of just buying shares and later writing calls? I pulled the trigger and doubled the size of my Newell holdings. Due to the impairment in many of my hospitality and commercial REITs, this did slightly imbalance my portfolio but not drastically, and Newell is a unique holding with no overlapping stocks.
The Most Boring "Rocket Ship" Ever, But I'll Take It
Certain message boards I look at from time to time talk about stocks taking off like a rocket ship, people post "To The Moon!" (or even "TO THE MOON!!!") and a little rocket ship emoji. Often these are penny stocks, pump and dumps, or story stocks. Rarely this is done for REITs or boring companies that make BIC pens, strollers, kitchen appliances, candles, and Rubbermaid goods. Yet, in just the last few days, Newell Brands has been the proverbial rocket ship, jumping 24.71% in the last five days. There was a small gain before June 3rd, and late in the week, the stock jumped, including a gain of before the unemployment numbers came out, and continued on Friday, June 5th, hitting a high of $16.77 Friday before dropping back to close up $.93 at $16.40. This left me in a fortunate if interesting position: Long term, Newell Brands is up 10% on an annual basis, and my recent buy-write is up 20% and solidly in the money now.
Possibly Overactive, But Profitable Trades
I had time to review the June and July calls while Newell was near the highs. Having learned my lesson from my last covered call writing on this stock (mea culpa here), I only looked at trades that would net a credit or a long-term capital gain. So, I took two steps:
1) Roll-out the call from the recent buy-write. I decided I would keep the strike price the same but roll out the call I was short by one month if I could get it at a credit. I.e., I would not "buy back my capital gain" as mentioned in the November article, which led to a real cash loss when the share price dropped. Because these trades are done buying at "ask" and selling at "bid", there are some trading costs, but by setting up the limit for a credit, at worst if it didn't fill, I could try again next week before the in-the-money call expired and I was called out of the shares. Much to my surprise, the order filled immediately, buying back my calls at $2.75 and selling July 17 $14 calls at $2.85. Not a huge credit, but $.08 per share going into my account is always better than going out. It also means I've netted more than a quarterly dividend extra in just over a month and still stand to have $1.60 per share capital gain if I get called out in July. My net gain appears to be $.29 (1st covered call) + $.08 (2nd covered call) + $.23 (May dividend) + $1.60 (capital gain) = $2.20 on a $12.60 purchase. With the paper losses (and maybe permanent impairment) I've suffered this quarter, I'll take it.
2) Write June 19 $17 calls (slightly out of the money currently). While I'm optimistic long term, this has been a rapid run-up in Newell's share price. The current price is ABOVE where the shares were trading when the market dove. I'm not sure I would initiate a new position at these prices, although I don't think I'll get a chance to pick up shares below $13 again either. So, I looked at slightly out of the money calls in case there is a retraction. June calls expire in two weeks, and the June 19 $17 calls were trading at $.40 a share. As my long-term basis is around $14 a share, getting both the May dividend, an additional $.40, and more than a 20% gain could be a good outcome. Even better, if the share price retraces toward the 50-day ($14.39) and 200-day averages ($13.62) either these calls expire worthlessly or I get called away and later can buy back in when the shares cool off a bit. RSI has been above 70 since June 3rd, showing an overbought or "ahead of itself" trend for the shares. Fundamentally, while stores reopening is good news for Newell Brands, there will likely be some short-term ugliness to earnings. I'll leave that discussion for another article or another contributor.
I entered a limit order and actually wrote the calls for $.41 with an expiration date in two weeks. The perfect workout will be the share price stalls above $16, I let these expire and, potentially, write another round of covered calls. As the time value erodes on trade 1) above, I will weigh rolling those out or allowing the shares to be called away in July for a high-teens return.
Hopefully, I will continue to find some opportunities like these to regain some losses, be more disciplined in execution than last fall, and, more importantly, stay healthy and safe while growing in my respect and appreciation for others.
Best wishes for investing success.
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Analyst’s Disclosure: I am/we are long NWL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I have written covered calls with differing strike prices on all my shares. 1/3 of these calls are "in the money", meaning I could be called out of that portion of my long position at any time.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein.
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