The overall market continues to trade without much conviction at the moment. Last week, the S&P 500 fell 0.37%, the Dow declined 0.36% and the Nasdaq pulled back 1.11%. As I’ve pointed out over the past few weeks, the bullish surge has been somewhat tainted by what has been going on below the market’s surface recently. Ideally, in a bullish environment, we would see healthy participation in most stocks, but that just hasn’t been the case over the past few weeks. As a result, I will continue to take a cautious, but certainly optimistic approach.
Cabot Profit Booster 186
Before I get into the nitty-gritty, I want to make you aware that L Brands (LB) recently announced a distribution of new Victoria’s Secret (VSCO) shares.
As always, I will keep you in the loop on anything related to what is currently a profitable position. Ultimately, we should have no worries.
Moving on …
The overall market continues to trade without much conviction at the moment.
Last week, the S&P 500 fell 0.37%, the Dow declined 0.36% and the Nasdaq pulled back 1.11%.
As I’ve pointed out over the past few weeks, the bullish surge has been somewhat tainted by what has been going on below the market’s surface recently. Ideally, in a bullish environment, we would see healthy participation in most stocks, but that just hasn’t been the case over the past few weeks. As a result, I will continue to take a cautious, but certainly optimistic approach.
We continue to stay focused on the factors (diversification, etc.) that have led to our long-term success. As a result, this week I will be adding American technology company Dynatrace (DT) to the portfolio following the company’s strong earnings report last week.
The Stock – Dynatrace (DT)
Why the Strength
In a world full of ice-cream-headache cloud-related stories, Dynatrace has an offering that’s easy to understand and should drive growth for many years to come. As the digital transformation of business accelerates with or without the pandemic, companies are adopting tons more business applications, putting them all in the cloud (or multi-cloud environments) and using more artificial intelligence to automate many actions and ease complexity.
And when you’re talking about massive banks, health care outfits, energy explorers or even government agencies, they have “generations of technology to manage and migrate off of and limited resources and expertise to deal with” such a transition, in the words of Dynatrace’s CEO.
The solution: Dynatrace’s platform, which lets medium- to large-sized clients (it focuses on the Global 15,000) get precise answers about the performance and security of their applications and infrastructure, as well as insight into the end-user experience.
The customer list is growing (135 new logos in Q2, 50% more new adds than a year ago), reads like a who’s who list of blue chips and those clients continually spend more money (same-customer revenue growth north of 20% for many quarters). Demand is strong and getting stronger—business is subscription-based, and annualized recurring revenue leapt to $823 million in Q2, up 36% from a year ago, while its remaining performance obligations (all money it’s owed under contract) is at $1.3 billion, up 46% from a year ago.
The top brass here repeatedly talks about 30%-plus growth being likely for “a long time to come” as it’s garnered just a fraction of its potential market. Earnings are well into the black but flat-ish as the firm ramps investments, but given the recurring revenue, Wall Street is on board with that strategy. We like it.
Technical Analysis
DT isn’t the fastest horse, per se, but it looks as if it’s begun a new advance—shares effectively consolidated for about 11 months before lifting to new highs in June, which was part of a persistent (up 7 of 8 weeks) rally. There was a little shakeout before earnings, and even a minor dip after the report, but the 25-day line has contained all pullbacks of late and DT moved back to new highs late last week. We’re OK starting a position here with a stop in the mid-50s. Stop — 55
The Covered Call Trade
Buy Dynatrace (DT) Stock at 64.50, Sell to Open September 65 Strike Calls (exp. 9/17) for $2.80 or a Net Price of 61.70 or less
Static Return: $280 per covered call (4.54%)
Breakeven: 61.70
Covered Call Return (if assigned): $330 per covered call (5.35%)
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 61.70 or less. (In this case 64.50 minus 2.80 = 61.70. Or another example is you could pay 65 for the stock and sell the call for 3.30, which also equals 61.70)
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.
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| Nutanix (NTNX) | 39.15 | 36.00 | 32.5 | August 40 -- $2.00 | $0.25 |
| Ford (F) | 14.13 | 14.00 | 12.6 | August 15 -- $0.48 | $0.13 |
| L Brands (LB) | - | Update Coming | - | Update Coming | - |
| Marvell Technology (MRVL) | 55.25 | 60.00 | 48.5 | August 55 -- $2.30 | $5.00 |
| Snap (SNAP) | 74.00 | 74.00 | 68.0 | August 78 -- $2.10 | $1.50 |
The next Cabot Profit Booster issue will be published on August 10, 2021.
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