Last week all the major indices took a small step back. The S&P 500 lost
1.69%, the Dow fell 2.15%, and the Nasdaq declined 1.61%.
The headlines say the 5-day pullback was the largest for the S&P 500 since February. But considering that the streak of over 230 days without a 5% pullback is still in play, the short-term bearish stretch last week was minimal.
And even with the slight pullback last week, my sentiment has not changed. I remain
“cautiously optimistic” until I see market action that changes my mind.
Of course, if we see further continuation of the recent bearish trend, I might begin to shift my outlook. But a week doesn’t make a trend, and again we must remember we are only a few percentage points from all-time highs.
Cabot Profit Booster 192
Last week all the major indices took a small step back. The S&P 500 lost 1.69%, the Dow fell 2.15%, and the Nasdaq declined 1.61%.
The headlines say the 5-day pullback was the largest for the S&P 500 since February. But considering that the streak of over 230 days without a 5% pullback is still in play, the short-term bearish stretch last week was minimal.
And even with the slight pullback last week, my sentiment has not changed. I remain
“cautiously optimistic” until I see market action that changes my mind.
Of course, if we see further continuation of the recent bearish trend, I might begin to shift my outlook. But a week doesn’t make a trend, and again we must remember we are only a few percentage points from all-time highs.
Finally, this week is expiration for four of our covered calls. For now, and this is subject to change based on market conditions, three of our positions are headed to full profit (DT, ON, BLDR), while one position (CFX) is basically trading at a breakeven. More on all of this Thursday afternoon or Friday morning.
This week’s pick is the enterprise provider of flash-based memory storage products, Pure Storage (PSTG).
The Stock – Pure Storage (PSTG)
Why the Strength
Pure Storage, which provides flash-memory-based storage products for enterprises, is leading the all-flash data center movement while offering some of the most advanced tools and services to automate data management for cloud-native applications.
The company had one of its best quarters on record in fiscal Q2 with “strong contributions” from new products, plus the highest operating profit in its history. Revenue grew 23% from a year ago, led by subscription revenue of $172 million (up 31%), which contributed 35% to total sales. Per-share earnings of 14 cents were 9 cents above the consensus and product revenue, meanwhile, was “very strong” with 19% growth—its highest year-over-year growth rate in seven quarters.
Management also indicated the firm is benefiting from an increase in enterprise-related Internet of Things (IoT) spending. Other metrics were equally impressive, with remaining performance obligations (RPO, basically all the money under contract due to it in the future) expanding 25% to $1.2 billion, reflecting continued strength of its subscription services—including record sales of unified subscription, pay-as-you-go storage.
Pure Storage also saw solid new customer acquisition (380 new customers, up 10%) and saw particular strength with new enterprise clients in the quarter. Going forward, the company is confident that its sustained momentum will continue and guided Q3 revenue to be around $530 million (up 30%) and well above the consensus forecast of $495 million.
It’s not changing the world, but after a few years in the wilderness, the wind is at the firm’s back today and the move to a subscription model is paying off.
Technical Analysis
The storage space isn’t the sexiest area of the tech sector, which may explain why PSTG lagged many of its peers following last year’s pandemic crash.
It wasn’t until December that the stock finally broke above its 2019 high of 20, a move which began a torrid 10-week rally to 30.
That said, PSTG gave back most of those gains in the months that followed before finally tightening up near 20—setting the stage for a big two-week, post-earnings rally. Stop—22.5
The Covered Call Trade
Buy Pure Storage (PSTG) Stock at 26.80, Sell to Open October 27 Strike Calls (exp. 10/15) for $0.85, or a Net Price of 25.95 or less.
Static Return: $85 per covered call (3.28%)
Breakeven: 25.95
Covered Call Return (if assigned): $105 per covered call (4.05%)
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 25.95 or less. (In this case 26.80 minus 0.85 = 25.95. Or another example is you could pay 27 for the stock and sell the call for 1.05, which also equals 25.95.)
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 |
| Dynatrace (DT) | 64.70 | 70.00 | 55.0 | September 65 -- $3.20 | $5.00 |
| ON Semiconductor (ON) | 44.60 | 48.00 | 40.0 | September 46 -- $1.40 | $2.00 |
| Colfax (CFX) | 48.35 | 47.50 | 44.5 | September 50 -- $1.00 | $0.05 |
| Builders FirstSource (BLDR) | 50.60 | 53.00 | 44.0 | September 50 -- $2.20 | $3.00 |
| Sonos (SONO) | 39.35 | 36.50 | 34.0 | October 40 -- $2.10 | $0.70 |
| Ternium (TX) | 53.45 | 52.25 | 46.5 | October 55 -- $2.05 | $1.50 |
The next Cabot Profit Booster issue will be published on September 21, 2021.
Cabot Wealth Network
Publishing independent investment advice since 1970.
President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
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