Market Overview
The holiday-shortened week was mostly a non-event as the S&P 500, Dow and Nasdaq were mixed. And while the week was quiet, under the surface there was selling pressure in growth stocks and materials that raised some yellow flags.
This week, in an attempt to keep the portfolio as diversified as possible we are adding a genomics play, though we are doing so by selling an in-the-money call.
The Stock – 10x Genomics (TXG)
Why the Strength
10x Genomics is a technology provider to biomedical researchers focused on human cells. The business is built on the premise that the next phase of genomics is moving beyond mapping and sequencing DNA to focus on both smaller biological forms (exploring the millions of molecules and their interactions within a cell) as well as larger ones (the complex interaction of many cells to form tissues and organs).
To 10x, the genomics industry has largely compiled the “parts list” of human biology, and now the industry is moving to understand how those parts fit together … and how to manipulate them for better health (and profit).
The company develops and sells highly sophisticated instruments and software and well as consumable products used in research for this next phase. Consumables were 85% of 10x’s revenue of $516 million last year, with a smaller, $73 million, slice of sales in instruments important for driving future growth of consumables. After years of hearty double-digit sales growth, 10x Genomics revenue ticked up only 5% last year, largely due to a shutdown-related cut of orders from China as well as some product cannibalization, as newer, higher-margin instruments ate away at the market share of older, less profitable ones. That said, a re-acceleration is likely at hand, with growth seen rebounding into the 20% range both this year and next. That will get revenue close to $600 million in 2023 even with China still weak (potential upside if orders there start to pick up).
What 10x does requires a lot of research and development expenses – that’s good in one sense because it disheartens competitors, giving the business a competitive moat. But it’s obviously negative as 10x burns plenty of cash, though analysts see the bottom line getting into the black next year, and cash flow positive by year-end 2023. 10x has always had a good story, and it appears to be leaving a tough stretch in the rearview mirror.
Technical Analysis
TXG topped near 200 over many months in 2021 and then a fundamental slowdown, a high valuation and the bear market sent the stock to the glue factory, falling to 24 near Halloween of last year with very few rally attempts along the way. However, TXG has changed character since then, with a quick pop into November, a rally into the low 50s after the calendar flipped and then a poke to new highs two weeks ago. Stop — 44.5
The Covered Call Trade
Buy 10X Genomics (TXG) Stock at 54, Sell to Open May 50 Strike Calls (exp. 5/19) for $6, or a Net Price of 48 or less
Static Return: $200 per covered call (4.16%)
Breakeven: 48
Covered Call Return (if assigned): $200 per covered call (4.16%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 48 or less. (In this case 54 minus 6 = 48. Or another example is you could pay 54.25 for the stock and sell the call for 6.25, which also equals 48)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on April 18, 2023.
