The market has been interesting as of late as the indexes have been mostly rising in the last two weeks, yet under the surface there are countless stocks not participating, or even breaking down. Unfortunately we own one of those stocks that have been weak, broke our mental stop, and which we will be exiting today …
To execute this trade you need to:
Sell SHAK Stock
Buy to Close the SHAK September 77.5 call for $0.05 (approximately).
Moving on …
This week we are adding an earnings winner, though because the stock is extremely volatile, we are doing so defensively.
The Stock – Samsara (IOT)
Why the Strength
Samsara is the leading cloud provider for firms with lots of physical assets, offering them a plug-and-play option (no need for professional installation) for telematics, video-based safety (better tracking of assets, fewer driving accidents, eventually lower insurance costs, etc.) and equipment monitoring (quickly locating and repositioning assets), with more offerings (like connected forms, allowing the digitization of standard forms like incident reports or inspections) coming by year’s end.
Yes, big transport firms are clients, but the opportunity is much broader than that, with construction, utilities, energy, agriculture and even airlines (ground support equipment at airports) signing up, with a whopping 84% of net new business in Q2 coming from non-transport areas. And they’re signing up because Samsara provides a very quick (within months) return on investment, which is key for people in charge of operations budgets, which the firm sells into.
The market size here is in the tens of billions of dollars, and big investors are seeing the writing on the wall that Samsara is going to get much, much bigger in time. In Q2, revenues grew 43%, annualized recurring revenue (ARR) was up 40% and net new ARR (which is split evenly between current clients expanding their purchases and new client sign-ups) is actually showing accelerating growth (up 33% in Q2), all while free cash flow turned positive in the quarter for the first time. (Samsara gets paid based on how many pieces of equipment are tied to its cloud offerings, so it’s not subject to employee turnover or layoffs.) Management made it clear they’re after the big players (half of its ARR comes from clients that pay over $100k a year, a figure that’s up 53% from a year ago), so the upside is huge as they expand their purchases.
To be fair, the valuation is up there, but Samsara smells like an emerging blue chip.
Technical Analysis
IOT flashed a rare sign of power (we call it Double Skyscrapers, with two massive-volume buying weeks and big gains) after earnings in early June, but shares quickly gave up most of their gain, and when the market turned weak, the stock dipped to 22 (29% off its highs). But the action of the past two weeks has been pristine, with a straight-up advance and a boom after earnings last Friday that took the stock back to its June highs. Stop — 26.5
The Covered Call Trade
Buy Samsara (IOT) Stock at 32, Sell to Open October 30 Strike Calls (exp. 10/20) for $3, or a Net Price of 29 or less
Static Return: $100 per covered call (3.44%)
Breakeven: 29
Covered Call Return (if assigned): $100 per covered call (3.44%)
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 29 or less. (In this case 32 minus 3 = 29. Or another example is you could pay 32.25 for the stock and sell the call for 3.25, which also equals 29)
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 September 12, 2023.
