Cabot Profit Booster Issue: April 23, 2024

Before we get into this week’s idea we need to clean up a couple of positions from April expiration last Friday. This is what we are going to do …

Sell FROG Stock
Sell HOOD Stock
Sell IOT Stock

Stepping back, we are closing our FROG and IOT positions for losses, while HOOD will be closed at its max profit.

Moving on …

There is no sugar-coating it, the market, led by the Nasdaq which has fallen for six straight trading sessions, had a bad week. By week’s end, the S&P 500 fell 4%, the Dow lost 1%, and the Nasdaq dropped 6.2%.

The Stock – Sweetgreen (SG)

Think of Sweetgreen as the Chipotle Mexican Grill of salads and more: A fast-casual chain that has made its mark with consumers by presenting itself as a healthier (but still tasty) option. For Sweetgreen, that means in addition to salads it offers popular items like warm bowls and, more recently, protein-centered dishes called Plates, which reportedly are off to a good start.

The company has been on a winning streak after the pandemic roiled its core business district lunch sales (since few were in the office). For Q4 2023, management reported the firm’s 11^th straight quarter of 20%-plus revenue growth, posting sales of $153 million and a narrower net loss of 13 cents per share. A lot of the strength comes from having cracked the code to produce fresh, consistently good salads on a large scale, though the danger is being seen as just salads by consumers. That’s why last fall it started rolling out Plates, featuring dishes like caramelized garlic marinated steak, herb-roasted chicken and miso-glazed salmon; Plates have boosted dinner orders significantly and have been seeing particularly strong reception in Texas and the southeast.

For 2024, management says it sees sales between $655 and $670 million (up 14% at the midpoint), bolstered by a couple of dozen new store openings. (The cookie-cutter aspect here is real, with the store count likely to rise more than 10% this year, but that would still leave the firm with “only” around 250 locations.) For Q1, to be reported May 9, consensus is for $152 million sales and a per share net loss of $0.18, both an improvement over last year.

Longer term, Sweetgreen expects Infinite Kitchen—its rebrand of the robotic fast food chain Spyce it bought last year—to excel in heavy-volume urban locations, where its robots can prepare 500 salads an hour and provide margins about 7% better than a Sweetgreen outlet.

Technical Analysis

SG was stuck in a wild, up-and-down bottoming area until the Q4 report vaulted the stock higher, with shares eventually tagging a 23-month high near 26 around the end of March. As the market has weakened, this stock hasn’t been immune, with a sharp 24%-ish retreat to its 50-day line—but that sets up a possible resumption buying opportunity. Stop — 18.5

The Covered Call Trade

Buy Sweetgreen (SG) Stock at 21, Sell to Open May 21 Strike Calls (exp. 5/17) for $1.50, or a Net Price of 19.5 or less

Static Return: $150 per covered call (7.69%)

Breakeven: 19.5

Covered Call Return (if assigned): $150 per covered call (7.69%)

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 19.5 or less. (In this case 21 minus 1.50 = 19.5. Or another example is you could pay 21.25 for the stock and sell the call for 1.75, which also equals 19.5)

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

The next Cabot Profit Booster issue will be published on April 30, 2024.

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