Market Overview
For the first time in weeks, and maybe even months, the market’s advance felt broader as more and more stocks participated in the market rally. That, as well as the VIX getting clobbered, has me encouraged … for now.
By week’s end the S&P 500 had gained 1.8%, the Dow had rallied 2%, and the Nasdaq had added another 2%.
This week we are adding an earnings winner, though we are doing so defensively as the stock is up BIG in the last couple of days.
The Stock – Samsara (IOT)
Why the Strength
The general cloud software field is perking up with the market and tech stocks, but we think the best opportunities will be with firms that are targeting large industries with sector-specific solutions that are saving clients time and money. Samsara might be the poster child for that: The firm’s platform is targeted at firms that have huge amounts of physical assets, such as state or city transportation departments, trucking firms, farmers, equipment rental outfits, oilfield service firms and more.
The benefits here directly hit clients’ bottom lines. Samsara has best-in-class vehicle telematics (with to-the-second GPS tracking), which can dramatically boost the efficiency of drivers (less idling time, etc.); allows for huge boosts in safety (in-cab alerts and safety/driving training), resulting in big reductions in accident costs, workers comp claims and even lower insurance costs; streamlines compliance activities for workers and the company itself; better uses data to pre-emptively service vehicles before they sputter, drastically reducing downtime; and better secures sites and boosts worker safety with AI-enabled cameras that can alert people when something is up.
The idea simply makes sense, especially for large outfits that have a ton of assets (United Rentals, Iron Mountain, Werner Enterprises are clients), and the fact that Samsara is the leader here means its data hoard is a competitive advantage—and the top brass made it a point to say it’s been using AI to parse its data and improve its offering for many years.
It’s a big idea, and Samsara is growing steadily—in Q1, annualized recurring revenue (ARR) was up 41%, and annualized recurring revenue for its largest customers was up 53%; 60% of net new ARR came from existing customers as they sign up for more services. Earnings and cash flow are near breakeven and expected to stay that way, but it’s looking like that may be conservative.
Technical Analysis
IOT came public just before the bear market got going, so it’s no surprise shares fell 70% or so from high to low. After a double bottom (with a little shakeout) in November, shares did improve, with a huge-volume earnings gap in early March bringing the stock to 21. The next few weeks were choppy and included a big correction, but after steadying itself, IOT exploded higher again on earnings last Friday and followed through on Monday. Stop — 20.5
The Covered Call Trade
Buy Samsara (IOT) Stock at 28, Sell to Open July 25 Strike Calls (exp. 7/21) for $4, or a Net Price of 24 or less
Static Return: $100 per covered call (4.16%)
Breakeven: 24
Covered Call Return (if assigned): $100 per covered call (4.16%)
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 24 or less. (In this case 28 minus 4 = 24. Or another example is you could pay 28.25 for the stock and sell the call for 4.25, which also equals 24)
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 June 13, 2023.
