The last several weeks have been a bloodbath for many stocks as the selling pressures have been overwhelming. Unfortunately, that selling has hit several stocks that have triggered our stops, and because of that we need to move on from three positions today.
To execute these trades you need to:
Sell PLTR Stock
Buy to Close the October 16.5 Call
Sell FRPT Stock
Buy to Close the October 75 Call
Sell IOT Stock
Buy to Close the October 30 Call.
Moving on …
It was a somewhat ugly week for the market as the Federal Reserve continued to push its hawkish agenda and the bond market reacted violently. By week’s end the S&P 500 had lost 2.93%, the Dow had fallen 1.89%, and the Nasdaq had declined by 3.62%.
The Stock – Vertiv (VRT)
Why the Strength
Artificial intelligence (AI) stocks have been under distribution for a few weeks now, with some of the more speculative ones really getting hit and even well-situated infrastructure names (AVGO, NVDA) taking on water. But Vertiv has held in there better than any of them, and it’s not hard to understand why, as business is already humming, should get stronger with any AI boost and the valuation remains reasonable.
The company is a big player in data center products, with battery management offerings, racks, switchgear, power offerings and thermal offerings, the latter of which are increasingly needed as more powerful chips operate at higher temperatures, which can in turn affect the performance of other IT equipment. (Vertiv has a good business in standard cooling solutions, and as liquid cooling offerings likely come into favor, Vertiv’s leading position should allow it to thrive.) Of course, this kind of equipment has been in demand for years, but supply chain issues hampered results in 2021 and into 2022—but now those issues are easing, leading to solid organic growth and margin expansion, just as AI demand is starting to pick up.
So far, the AI numbers are small, as in the Q2 conference call AI-related orders were cited as being in the “tens of millions of dollars,” but more important is that Vertiv said it’s having “conversations with very relevant market players around security capacity not just over the next few quarters, but well into 2024 and beyond.” Now, that doesn’t mean Vertiv is about to start growing by triple digits; management’s outlook is for 20% top-line growth this year and analysts see just 7% sales growth in 2024. However, (a) that’s likely conservative, (b) even with those assumptions, earnings are likely to expand at 20% to 30% rates going ahead, and (c) the valuation (23x this year’s earnings, <20x 2024 numbers) indicate that not a ton of expectations are priced in despite the stock’s massive run. All in all, Vertiv looks like one of the top tech infrastructure plays out there.
Technical Analysis
VRT has had a huge, huge run, kicked off by earnings in April and, after a non-stop advance, it went wild again after earnings in early August. Such action usually causes us to shy away from new buys until we see a fresh correction and base-building effort, as gains tend to be given back. But the difference now is that the market is trashing everything—and yet VRT, at least to this point, has retreated normally and on light-ish volume despite having every reason to cave in. Of course, it’s still possible the sellers eventually come around for it, but the resilient action sticks out like a sore thumb. Stop — 30
The Covered Call Trade
Buy Vertiv (VRT) Stock at 36.5, Sell to Open November 35 Strike Calls (exp. 11/17) for $3.80, or a Net Price of 32.7 or less
Static Return: $230 per covered call (7.03%)
Breakeven: 32.7
Covered Call Return (if assigned): $230 per covered call (7.03%)
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 32.7 or less. (In this case 36.5 minus 3.80 = 32.7. Or another example is you could pay 36.2 for the stock and sell the call for 3.50, which also equals 32.7)
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 October 3, 2023.
