Led by the meltdown in the financial sector, the market had an awful week. The numbers weren’t pretty as the S&P 500 fell 4.76%, the Dow lost 4.45%, and the Nasdaq declined 4.16%.
Hopefully this isn’t the start of another market meltdown. That being said, we have to be open to any possibility.
The Stock – Samsara (IOT)
Why the Strength
Now here’s a new name with a very big idea: Samsara is a cloud software operation that focuses on firms with large physical operations—think about a trucking or shipping outfit, a big farming company or even departments of transportation for cities or states, all of which have tons of trucks, plows, harvesters, haulers and so on. Samsara has become the best way for these organizations to dramatically boost efficiency: Its platform helps with telematics (real-time info on the entire fleet) that can boost safety and even idling time. It also offers video-based safety apps (and in-cab alerts!) for drivers, the digital inputting of driver reports, and even diagnostic data of the fleet so the most needy machines get servicing to prolong their life.
Taming insurance premiums (a huge expense for these kind of firms) is also a huge draw, with the platform using AI to analyze driver behavior and even road conditions to cut back on potential accidents—and, more important, records the data so insurance outfits can better underwrite the entire fleet.
It’s a huge idea, and to be fair the valuation here is big ($10 billion on a $750 million revenue run rate), but the potential looks even bigger and Samsara is starting to sign up some bigger fish. Revenues have been cranking ahead nicely and topping estimates, while the number of clients that are buying at least $100k each year is growing even faster (north of 50% in Q4) and free cash flow should reach breakeven by year-end. We think there’s a long runway of growth in this enticing niche.
IOT came public in late 2021 and was crushed after that as the bear market got going; shares plunged from near 30 to about 9 in May, and after a summer rally, dipped to a slightly lower low in November. The initial bounce from there was just OK, but IOT has changed character this year, rallying persistently through February and gapping up on gigantic volume after Q4 results this month. Stop — 15.2
The Covered Call Trade
Buy Samsara (IOT) Stock at 20.25, Sell to Open April 20 Strike Calls (exp. 4/21) for $1.50, or a Net Price of 18.75 or less
Static Return: $125 per covered call (6.66%)
Covered Call Return (if assigned): $125 per covered call (6.66%)
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 18.75 or less. (In this case 20.25 minus 1.50 = 18.75. Or another example is you could pay 20.15 for the stock and sell the call for 1.40, which also equals 18.75)
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 …
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 March 21, 2023.