Time to Remodel Your Portfolio With This Stock

American Woodmark is a major manufacturer of kitchen cabinets and vanities used for both home construction and remodeling. They sell through retailers like Home Depot and Lowe's , as well as directly to builders and contractors. Some of their popular brand names are shown below. From fiscal 2012 through 2020 (fiscal years end on April 30 of the following year) all major metrics moved up sharply. Continuous shareholders were happy, too, as the shares gained almost 500% since Jan. 28th of 2012. I recommended AMWD here on Real Money Pro in June, with the stock at $71.65. At that time, I also suggested setting up Jan. 15, 2020 expiration date $75 strike price buy/write combinations as shown below. That expiration date passed a couple of weeks ago and the best-case scenario played out exactly as written up. From June 18, 2020 through Jan. 27, 2021 AMWD rose from $71.65 to $87.73. That represented a solid gain of $16.08 per share, or up 22.42%. Buy/write combinations, though, produced an 82.2% gain due to the structure of the trades, which reduced the initial cash outlay from $7,165 per 100-shares to just $4,115. It's nice to be able to show you already closed-out follow-ups like this to prove that the superior return potentials on buy/writes described are not pie in the sky hyperbole. AMWD reached about $105 in late December of 2020. Since then, it had regressed a bit. As of Thursday, it was again offered for under $88. Meanwhile, the firm is well on its way to posting its best year so far. Fiscal 2020 is now expected to come in with EPS around $7, putting the shares at just 11.7-times its fiscal 2021 estimate. Excluding the Covid-panic low, AMWD has rarely traded at such a low multiple. The stock's three should have sold moments (red-starred below) all occurred with AMWD trading at well above average valuations ranging from 16.8-times to 24.8-times current earnings. A simple regression-to-the-mean valuation reversion justifies around $118 as a 12-month target price. Hitting that goal would deliver a solid 34.2% gain from here. That goal is not far fetched. Nor is it an upper limit. AMWD topped out between $109.30 and $148.40 during each of the four years stretching from 2017 through 2020. It touched $101.46 earlier this month. Fundamentals are stronger now than during any of those years. American Woodmark is benefiting from the home building boom. It is also doing great business on the remodeling side as people trapped at home are refurbishing their kitchens and bathrooms while they have the time. Money that would have been spent on vacations is now being redirected back into making home more inviting. Yahoo Finance sees AMWD reaching $109.25 by next January. I'd call their view a bit conservative as it implies a lower than typical ending multiple. Even so, simply reaching that target would provide a very acceptable 25% return. Buying shares outright appears to be a good choice. As always, though, there are alternative ways to play the same idea. The graphic below showed the Jan. 27, 2021 closing quotes on AMWD and its Dec. 17, 2021 expiration date options at $90 and $95 strikes. Selling naked puts would have brought in juicy premiums of either $17.50 or $20.50 per 100-share commitment. Worst-case, forced purchase prices would have been either $72.50 or $74.50 per share, providing nice margins of safety versus the trade inception price. Maximum gains on these, or any other option sales always equals 100% of the money received up front. In these examples that would be either $1,750 or $2,050 per contract. Traders who understand the benefits of buy/writes could set up Dec. 2021 $95 combinations as shown below. At 4 p.m. on Dec. 17, 2021 there are just two possible outcomes. AMWD will either close at $95 or higher, or below $95. If the former occurs the best-case scenario detailed next will play out. Any upturn of at least 8.3% from the trade inception price would translate into a huge 78.47% cash-on-cash return. That's almost as good a gain as the one which just finished on my previous buy/write two weeks ago. What if AMWD fails to hold $95 on expiration day? If so, the worst-case scenario described next would unfold. Barring major unexpected bad news even that possibility appears far from scary. Yes, you'd end up with a doubled-sized position in AMWD, but at the attractive price of just $74.12 per share. That's about 15.5% below the trader inception price. AMWD spent the majority of its most recent half-decade well above that break-even price. The few times it dipped below never lasted long. Better still, EPS grew by greater than 61% over that period making the absolute value of AMWD much higher than it was back in 2016 to 2019. Buy some AMWD shares, sell some puts or consider setting up full buy/write combinations.

Time to Remodel Your Portfolio With This Stock

I see American Woodmark as a 'cabinet level' play.

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