I’m Organizing a Bottom-Fishing Expedition

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I have been talking about the “stealth” bear market in many parts of equities for the better part of six months now. Well, the bear market became less stealthy last week as the S&P 500 joined the Nasdaq in official bear market territory.

The Dow has now dropped for eight consecutive weeks. That has only happened one other time and that was in 1923. The S&P 500 has now been down seven consecutive weeks — the first time since a record eight weeks in a row in 2001. Equities are collectively down nearly $24 trillion from their highs, about the size of annual GDP.

Outside of the energy sector, there are few areas of the market that aren’t in a significant bear market. Small-caps in the biotech, electric vehicle, Adtech, and AI industries are littered with names that are down 50%, 60%, 70%, and even 80% from where they stood last summer.

What’s my trading strategy amid this situation? I’m patiently doing what hopefully turns out to be bottom fishing in many small-cap names via covered call orders. Remember, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.

I am sticking for the most part to small-cap companies that are already profitable and have no need to raise additional capital for the foreseeable future. Let’s profile one of these names here.

My regular Real Money readers know I have been negative on retail names for quite some time due to the declining situation of the consumer, which has lost substantial buying power due to inflation for more than a year. Retailers’ profit margins are also under distress thanks to their own cost pressures.

However, I did open a position in The Container Store Group  (TCS) Friday using covered call orders. This specialty retailer focuses on providing customers with storage and organizational solutions in some 30 countries. Domestically, the company operates around 100 stores in 33 states. The Container Store is the only major concern dedicated solely to this category.

There are reasons to be somewhat positive on this name after a significant selloff in the shares over the past couple of quarters. First of all, TCS was one of the few retailers reporting better-than-expected first-quarter results last week when both Target (TGT) and Walmart (WMT) deeply disappointed  investors.

For the fiscal year ended April 2, 2022, TCS delivered record earnings of $1.62 a share. For the year, the company exceeded $1 billion in sales for the first time in its history.

The company has only a 5% market share in the home storage and organization market and plans to increase sales to $2 billion by FY 2027.

In this environment, analysts are not so sanguine on TCS’s prospects for FY 2022 as they are collectively modeling in $1.25 a share in profits on the slightest bump in revenues for the current fiscal year. However, even that outlook leaves TCS trading for approximately six times earnings and at an approximate 0.35 price-to-sales ratio.

The company’s CEO added nearly $200,000 to his TCS holdings in February and there has been no insider selling so far in 2022. The balance sheet is in good shape with a leverage ratio of just 1.0.

With the added protection from a simple covered call strategy, it is easy to see the value of this retail play.

Here is how one can initiate a position in TCS via a covered call strategy. 

Using the January $7.50 call strikes, fashion a covered call order with a net debit in the $6.00 to $6.10 a share range (net stock price – option premium). This strategy provides 25% of downside protection as well as nearly the same potential upside even if the stock declines a bit over the option duration.

(Bret Jensen is a regular contributor to Real Money Pro. Click here to learn about this dynamic market information service for active traders and to receive columns from daily columns and trade ideas from Tim Collins, Paul Price, Doug Kass and others.)

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