December 7, 2021

This week I’m adding a recent earnings season winner, an American developer of all-flash data storage hardware and software products, Pure Storage (PSTG).

Market Overview

As traders returned from the holiday-shortened week they were greeted with a brutal attack by the bears. Every attempt by the bulls to rally the market and individual stocks was quickly met by selling pressure.

And while the Dow lost 0.9%, and the declines of 1.2% for the S&P 500 and 2.6% for the Nasdaq weren’t pretty, the real story of the week was the aggressive selling of growth stocks and the deterioration of the Russell 2000, which fell 4%.

This week has gotten off to a better start for the bulls. That being said, there are still plenty of potholes and worries.

This week I’m adding a recent earnings season winner, an American developer of all-flash data storage hardware and software products, Pure Storage (PSTG).

New Recommendation

The Stock – Pure Storage (PSTG)
Why the Strength
Pure Storage provides flash-based data storage hardware and software products for data centers, and offers storage-as-a-service solutions that combine on-premise data storage with public cloud services.

The company is in the midst of transitioning from selling only hardware to also offering software and storage services using a subscription model, the success of which was highlighted in its third-quarter results. Pure Storage saw its Q3 revenue rise 37% from a year ago to $563 million, beating estimates by 6%, while per-share earnings came in 10 cents above estimates at 22 cents.

The company, which saw strong customer demand and execution from both the public and private sectors, added 345 new customers for a total count of around 9,500 in the quarter, including more than half of the Fortune 500. Other metrics were equally impressive, with subscription service revenue growing 38% and remaining performance obligations (which includes committed and non-cancelable future revenue) rising 27%.

Also in the quarter, Pure acquired Portworx, a cloud-native data storage and management platform that has since been integrated into its growing portfolio of subscription services. Additionally, the company repurchased over 2.3 million shares in Q3 (nearly 1% of the total) and has more buyback power left. Pure’s sterling Q3 performance inspired a bevy of upgrades from Wall Street, with several big names raising price targets.

It’s not changing the world, but Pure Storage’s business looks like a good bet to pick up steam from here.

Technical Analysis
PSTG hit a record high of 29 in February, then turned sharply lower, finally hitting a low at 17 in May. A 14-week base followed with shares tightening between 18 and 21, and PSTG completed the bottoming period in late August with a high-volume breakout on earnings.

Eleven more weeks of relatively tight trading followed, with shares taking off yet again after the latest report. More recently, PSTG has been hacking around, but its refusal to give ground in the tech selloff bodes well. Stop—26.50

The Covered Call Trade
Buy Pure Storage (PSTG) Stock at 33, Sell to Open January 33 Strike Calls (exp. 1/21) for $2.10 or a Net Price of 30.90 or less

Static Return: $210 per covered call (6.79%)

Breakeven: 30.90

Covered Call Return (if assigned): $210 per covered call (6.79%)

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 30.90 or less. (In this case 33 minus 2.10 = 30.90. Or another example is you could pay 32 for the stock and sell the call for 1.10, which also equals 30.90.)

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 December 14, 2021.