*Note: Your next issue of Cabot Profit Booster will arrive next Wednesday, February 19 due to the market holiday next Monday, February 17 in observance of Presidents’ Day.
The volatile and sloppy start to 2025 continued last week as the indexes fell hard on Monday, recovered in the middle part of the week, and then lost ground again on Friday. For the week the S&P 500 fell 0.2%, the Dow lost 0.5%, and the Nasdaq declined by 0.5%.
The Stock – Affirm (AFRM)
There was a pig pile in the buy-now, pay-later space when it burst on the scene during the easy-money, zero-interest-rate times of the pandemic, but the past few years have separated the wheat from the chaff and Affirm has come through it in the leadership position.
The firm has always emphasized being clear with consumers about any fees and rates it’s charging, and for corporate clients that have to put up money to fund the purchases, and the firm’s top-notch underwriting and servicing has more and more of them willing to lend. All told, it’s been a benefit to everyone involved: Consumers get more time to pay off larger purchases (Affirm’s own credit card plays into this, with merchandise volume doubling in Q4); lenders make a buck for providing the money; and of course, merchants notch greater sales as consumers are more willing to pull the trigger.
Throw in the fact that Affirm has kept a lid on costs, and investors see plenty of runway for growth as Affirm expands into more industry verticals (GoodRx joined late last year; it re-upped a five-year deal with a big air carrier) and internationally (launched in the U.K. just before the end of 2024).
Indeed, Q4 confirmed that business is booming as the firm’s offerings become more popular: Gross merchandise volume lifted 35% (including a 40% lift from the firm’s top five merchants), active consumers grew 23% (the fourth straight quarter of acceleration) and merchants increased 21%, all while operating income grew 48% as margins expanded. Obviously, loan quality here is a huge factor, but all is quiet (in a good way) on that front, with charge-offs of recent customer cohorts tracking to 3.5%—in line with historical trends. Obviously, a huge economic pothole would be very bad, but barring that, Affirm should continue to grow rapidly as it’s scratching the surface of the potential market.
Technical Analysis
AFRM had a horrible first half of 2024, falling from just over 50 to a low near 23 in mid-summer. The stock surged off its lows at that point and, after two months of hacking sideways, lifted as high as 73 last December. The pullback with growth stocks was tedious (down 29%) but not out of character for this volatile name, and the last two weeks have seen a huge snapback, highlighted by the big-volume, earnings-induced move last Friday. Stop – 62
The Covered Call Trade
Buy Affirm (AFRM) Stock at 77, Sell to Open March 75 Strike Calls (exp. 3/21) for $7, or a Net Price of 70 or less
Static Return: $500 per covered call (7.14%)
Breakeven: 70
Covered Call Return (if assigned): $500 per covered call (7.14%)
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 approximate Net Price, or 70 or less. (In this case 77 minus 7 = 70. Or another example is you could pay 76.5 for the stock and sell the call for 6.50, which also equals 70.)
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
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| Rubrik (RBRK) | 65 | 76.5 | 56 | February 70 -- $3 | $6.50 |
| Robinhood (HOOD) | 42.75 | 56 | 33.5 | February 42 -- $4.75 | $14.00 |
| Cloudflare (NET) | 121.15 | 170 | 107 | February 120 -- $8.50 | $50.00 |
| Guardant Health (GH) | 47.4 | 44.25 | 36.5 | February 50 -- $2.40 | $1.00 |
| Shopify (SHOP) | 119.5 | 122 | 104 | March 120 -- $10.50 | $8.00 |
The next Cabot Profit Booster issue will be published on February 19, 2025.
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