Cabot Profit Booster Issue: August 6, 2024

The dramatic decline in the stock market of the last couple weeks has pushed two of our positions through our stops. And because of that we are going to exit those positions …

To execute these trades you need to:
Sell CCL Stock
Buy to Close the August 18 Call.

And

Sell URBN Stock
Buy to Close August 47 Call.

Moving on …

Well, that was a roller coaster of a week filled with worries, then jubilation, and finally concern yet again. By week’s end the S&P 500 had fallen 2.44%, the Dow had lost 2.43%, and the Nasdaq had pulled back another 2.37%. And if those numbers weren’t enough, the Russell 2000 lost a somewhat staggering 7.16% on the week.

The Stock – Sprouts Farmers Market (SFM)

Sprouts Farmers Market (SFM) is the second-largest natural and organic food retailer in the U.S., after Amazon’s Whole Foods, making it one of the few pure plays to follow the growth of consumer demand for healthier grocery carts.

Sprouts reported sales of $1.9 billion in the recently reported second quarter. That’s up 12%, including an impressive 6.7% same-store sales gain. In a sign that the gains aren’t inflation-driven, the quarter was nicely profitable too, as net income per share rose 33% to 94 cents. Part of that is management’s focus on its in-house Sprouts brand, which offers better margins than name brands; it accounts for more than a fifth of all sales in Q2. Management has used all the cash to eliminate its debt and start a share buyback program that still has about $585 million left to spend.

With 419 locations now, Sprouts has designs to triple that over the long term (it should open 35 total for 2024). While the grocery business is highly competitive, management does a good job distinguishing the stores with dedicated “foraging” teams that seek out products to stock that competitors don’t sell. It also does a lot of promotions that excite its core customers, like giving away free basil plants on Earth Day, and pushing deeper into stocking products for a variety of specialty diets, like keto and vegan. The company is also in the early days of testing a loyalty program that could goose customers to do more of their grocery shopping there.

For full-year 2024, Sprouts sees sales rising nearly 10% to $7.5 billion, with same-store sales up about 5%. Management says total earnings per share for the year should be around $3.33, though the continuing share buyback (share count was down 2.2% from a year ago in Q2) probably makes the final EPS look even better.

Technical Analysis

SFM has been on an uptrend for nearly two years, with the trendline recently getting steeper as continuing excellent execution on quarterly earnings draws in more investors. Earnings last week sparked the strongest buying in 14 months and rallied SFM to an all-time high near 104 before the market’s selloff took a chunk out of it—though the damage has been very limited, and the earnings gap area could provide support on dips. Stop — 80

The Covered Call Trade

Buy Sprouts Farmers Market (SFM) Stock at 95, Sell to Open September 95 Strike Calls (exp. 9/20) for $4.50, or a Net Price of 90.5 or less

Static Return: $450 per covered call (4.97%)

Breakeven: 90.5

Covered Call Return (if assigned): $450 per covered call (4.97%)

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 90.5 or less. (In this case, 95 minus 4.50 = 90.5. Or another example is you could pay 94.65 for the stock and sell the call for 4.15, which also equals 90.5.) 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

The next Cabot Profit Booster issue will be published on August 13, 2024.

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