Market Overview
Mega-cap tech again outperformed last week, while the banks continued to look suspect/horrible, and the action under the surface is flashing warning signs. But despite the narrow leadership of tech the S&P 500 was only down 0.3%, the Dow lost 1.11%, while the Nasdaq gained 0.4%.
This week is the expiration of eight of our positions. Expect to hear from me on how we will manage these trades Thursday afternoon or Friday morning.
The Stock – Exact Sciences (EXAS)
Why the Strength
Exact Sciences is building on the strength of its Cologuard colon cancer test to provide a whole suite of non-invasive screens for cancers. Launched less than a decade ago, Cologuard uses stool samples to identify DNA and hemoglobin markers associated with cancers.
The company tested more than a million patients in the U.S. in the first quarter, helping revenue to rise 24% to $603 million, with rising EBITDA margins and a narrowing net loss, to 42 cents a share from $1.04 last year. The company estimates Cologuard is used by about 10% of the target U.S. population—mainly people over 50—so there’s still plenty of upside there.
Many users are people who had a colonoscopy once and don’t want another, while there are about 60 million people who never had one or have fallen behind on their return screenings; management believes it can quadruple its U.S. Cologuard business alone by capturing more of that group. Partly, that optimism is from finding it easier to convince doctors to use the test thanks to recently switching to the Epic database system used by most of the industry, which allows testing and results to be propagated throughout physicians and hospital systems electronically. Beyond Cologuard, Exact’s expertise in using biomarkers from stool samples has allowed it to develop increasingly utilized screens for breast cancer and prostate cancer (making up about a quarter of revenue).
Exact Sciences upped its full-year guidance last week on the strength, forecasting about $2.4 billion in sales, up 15% over 2022, and sees free cash flow turning positive later this year (ahead of the original 2024 target). It also sees a good potential market in Canada, where limited capacity for colonoscopies means there’s a seven-year wait.
Technical Analysis
Last autumn EXAS was able to finally break a 21-month downtrend, which saw shares grind down from the all-time high at 160 to a low of 29. The powerful off-the-bottom move ran out of steam in mid-January, but impressively, EXAS held very nicely—it pulled back “only” 18% and mostly marched sideways even as the broad market hit some air pockets. And then, last week, shares broke out nicely after earnings. Stop — 67
The Covered Call Trade
Buy Exact Sciences (EXAS) Stock at 80, Sell to Open June 80 Strike Calls (exp. 6/16) for $4, or a Net Price of 76 or less
Static Return: $400 per covered call (5.26%)
Breakeven: 76
Covered Call Return (if assigned): $400 per covered call (5.26%)
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 76 or less. (In this case 80 minus 4 = 76. Or another example is you could pay 79.5 for the stock and sell the call for 3.50, which also equals 76)
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 May 23, 2023.
