It was a strong week for the market following the Federal Reserve meeting. And while some talking heads may say the reason the indexes rallied was the Fed’s moves, or lack thereof, more likely the reason is we are in a bull market.
By week’s end, the S&P 500 gained 1.4%, the Dow rallied 1.6% and the Nasdaq advanced by 1.7%.
The Stock – Toast (TOST)
Most payment firms have been iffy performers during the bull run, but Toast has always had a good story and solid sponsorship—and now we may be seeing investor perception finally turn up.
The firm’s offerings are developed and targeted specifically for the restaurant industry, which is gigantic, with 860,000 locations in the U.S. that bring in over $1 trillion of revenue, and that says nothing of the overseas opportunity that is many times that. And while point-of-sale offerings are a huge part of business, the company is really a one-stop shop for much of a restaurant’s operations and infrastructure, with offerings for table service, counter service, mobile order, deliveries (including from third parties) and drive-thrus; managing gift cards, loyalty programs and multi-location management; and even getting into the people aspect of the business via payroll, scheduling, managing tips and much more.
The firm sells its wares on a subscription basis, and growth has been solid for a while now—in Q4, the company’s annualized recurring revenue totaled $1.2 billion (up 35%), while gross payment volume last year came in at $126 billion (up 38%) and Toast served 106,000 locations by year-end (up 34%) as clients continued to expand with them (17% same-customer revenue growth rate). And underlying it all are solid economics, with the payback for getting new clients around 14 months last year, partly thanks to one-fifth of new customers coming via referral.
While growth may slow some as Toast grows, cash flow should crank ahead this year: While accounting earnings remain in the red, EBITDA came in at $61 million last year and management’s early outlook is for that to grow to $210 million in 2024.
Technical Analysis
TOST crashed during the bear market after a hyped IPO, but it’s spent more than a year and a half essentially attempting to bottom out, as it’s thrashed around the 14 to 25 range. The last test of the lows came in November, with the stock starting to repair the damage soon after that—and TOST’s bullish earnings reaction in mid-February has led to a push back to the top of this giant range. If you’re game, we’re OK starting small here or on dips with a stop near 20. Stop — 20
The Covered Call Trade
Buy Toast (TOST) Stock at 24.5, Sell to Open May 25 Strike Calls (exp. 5/17) for $1.90, or a Net Price of 22.6 or less
Static Return: $190 per covered call (8.4%)
Breakeven: 22.6
Covered Call Return (if assigned): $240 per covered call (10.61%)
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 22.6 or less. (In this case, 24.5 minus 1.90 = 22.6. Or, another example is you could pay 24.4 for the stock and sell the call for 1.80, which also equals 22.6.) 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 |
| JFrog (FROG) | 44.75 | 43.3 | 36 | April 45 -- $2.90 | $1.35 |
| Robinhood (HOOD) | 15.85 | 19.45 | 13.4 | April 17 -- $0.95 | $2.70 |
| Samsara (IOT) | 38.7 | 39 | 33 | April 40 -- $2.20 | $1.50 |
| Permian Resources (PR) | 16.7 | 17.5 | 14.2 | May 17 - $0.75 | $1.00 |
The next Cabot Profit Booster issue will be published on April 2, 2024.
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