As we plow into March, the overall story remains mostly the same for the market—the primary evidence remains strong, with the trends of the major indexes up, most leading stocks in good shape and with hundreds of stocks hitting new highs.
The Stock – Robinhood (HOOD)
Why the Strength
After disrupting the brokerage business and lighting a fire under its competitors with offers of commission-free transactions, financial services platform Robinhood fell out of favor with investors during the bear market year of 2022 as revenues dropped while active users sharply declined. But with the bull’s resurgence last year, Robinhood has seen a steady return of customers—a big reason for the share price strength, while the firm is also making moves to bolster its positioning.
Robinhood’s platform allows clients to buy and sell stocks, options and cryptocurrencies with a user-friendly app and also offers some kickers to attract new clients (like a 1% match on all IRA contributions) while expanding overseas (launched in the U.K. last November and now offers crypto trading in Europe, too).
In Q4, the company reported revenue up 24% from a year ago and per-share earnings of three cents that beat estimates by four cents. Significantly, new clients and account transfers from competitors fueled strong net deposits of $4.6 billion in the quarter, with an average of over $100,000 per transfer, further extending a trend of Robinhood taking market share in the industry. Moreover, assets under custody finished Q4 back over $100 billion for the first time since 2021, while net deposits grew at a 21% annualized rate. Other metrics were equally impressive, with net interest income (a boon to all brokerages as rates have moved up) increasing 41% to $236 million and transaction-based revenue rising 8% to $200 million (options are the biggest draw here, making up 60% of transaction revenue).
Moving forward, management said 2024 is off to an even better start than last year’s unusually strong Q1 and that Robinhood has already brought in more funded customers and net deposits through the first half of Q1 than it did in all of Q4. The firm further plans on launching new products, including credit cards, with a focus on expanding into international markets.
Obviously, if the market keels over, all bets are off, but if this is a new bull market, Robinhood should capture more than its fair share of new investors as big-picture sentiment improves.
Technical Analysis
HOOD has spent most of the past year in a volatile trading range between 8 and 13, with buyers and sellers fighting it out and lots of jagged moves (including on earnings) during that time. That all changed with last month’s Q4 report, as shares blasted out of the range on monster volume and, impressively, it’s followed through nicely on the upside to two-year highs. HOOD is a bit stretched from support, though we do like the power. Stop – 13.4
The Covered Call Trade
Buy Robinhood (HOOD) Stock at 16.5, Sell to Open April 17 Strike Calls (exp. 4/19) for $1.20, or a Net Price of 15.3 or less
Static Return: $120 per covered call (7.84%)
Breakeven: 15.3
Covered Call Return (if assigned): $170 per covered call (11.11%)
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 15.3 or less. (In this case 16.5 minus 1.20 = 15.3. Or another example is you could pay 16.30 for the stock and sell the call for 1, which also equals 15.3).
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 March 12, 2024.
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