After an ugly start to the week on Monday of last week, stocks rallied very impressively as the S&P 500 gained 4.6%, the Dow added 2.5% and the Nasdaq surged higher by 6.7%.
The Stock – Toast (TOST)
Toast has always had a simple, powerful growth story, and after (mostly) sitting out the last bull cycle, we’re wondering if the stock is ready to help lead the next advance as big investors (1,170 funds own shares, up from 939 six months ago) pile in. The company is known as a payments firm, but it’s really an all-encompassing software solution for the gigantic restaurant industry (860,000 locations in the U.S. alone, with millions more overseas), offering clients just about everything they need to run their ship, including point-of-sale and mobile ordering solutions, invoicing, kitchen display technology, drive-thru solutions, payment processing and financing, gift card and loyalty management, payroll and scheduling, tips management, email marketing, catering tools and much more.
While there’s competition and Toast’s offering is generally richly priced, the solution works, with 20% of new clients actually coming from referrals and three-quarters coming from inbound marketing methods (not outward sales calls). The company’s main focus is on recurring revenue, both through payment processing and subscriptions, and that metric has been growing rapidly, with annualized recurring revenue in Q4 of $1.6 billion, up 34% from the year before—yet that’s just a fraction of the $15 billion serviceable market for Toast in the U.S. alone.
Meanwhile, total locations leapt to 134,000, up 26%, and gross payment volume was up 25%. Growth has been solid for a while, but importantly, the bottom line here is also starting to perk up (EBTIDA of $111 million in Q4, up from $29 million the year before) while free cash flow was 13 cents per share or so in Q4, well ahead of earnings. The 2025 outlook calls for another round of big growth (EBITDA up 39%), but more will be revealed on May 8 after the close, when the firm will report Q1 results. We’ve always liked the story here, and if the stock can truly kick into gear (and if the market turns healthy), we think it can be a leader.
Technical Analysis
TOST had an endless bottoming pattern that it finally broke free from in September, running up to the 44 level by November and flashing major accumulation (three straight big-volume buying weeks). However, shares topped there and, after retesting the highs in February, fell with the market. The correction was steep (35% or so), though volume was modest, and TOST found solid support soon after the lows, with a move above its 50-day line (better than 70% of stocks) last week. Stop – 32.5
The Covered Call Trade
Buy Toast (TOST) Stock at 36, Sell to Open May 36 Strike Calls (exp. 5/16) for $2.25, or a Net Price of 33.75 or less
Static Return: $225 per covered call (6.66%)
Breakeven: 33.75
Covered Call Return (if assigned): $225 per covered call (6.66%)
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 approximate Net Price, or 33.75 or less. (In this case 36 minus 2.25 = 33.75. Or another example is you could pay 36.25 for the stock and sell the call for 2.50, which also equals 33.75)
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
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| AngloGold Ashanti (AU) | 35.75 | 41 | 30 | May 36 -- $2.10 | $5.00 |
| Monster Beverage (MNST) | 57 | 58 | 51 | May 57.5 -- $2.65 | $2.50 |
| Comstock Resources (CRK) | 19.2 | 18.5 | 17.5 | May 19 -- $1.70 | $0.85 |
| Uber (UBER) | 75 | 78 | 63 | May 70 -- $7.55 | $10.00 |
The next Cabot Profit Booster issue will be published on May 6, 2025.
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