Cabot Profit Booster Issue: February 25, 2025

Before we dive into this week’s idea, we need to clean up our February positions that expired on Friday. First off, both our NET and HOOD positions closed for their full profits.

However, RBRK and GH stocks closed below their strike prices, which means the calls we sold expired worthless, and we are left with the stock positions, which we are going to sell today.

To execute these trades you need to:

Sell RBRK Stock

And

Sell GH Stock

Moving on …

After notching an all-time high earlier in the week, the S&P 500 and its index peers came under intense selling pressure to close the week. By week’s end, the S&P 500 fell by 1.7%, while the Dow and Nasdaq both lost 2.5%.

The Stock – Royalty Pharma (RPRX)

Royalty Pharma is the largest buyer of pharmaceutical royalties, with a portfolio of about three dozen regulator-approved products, including 15 blockbusters—those generating more than $1 billion in annual sales. Think of the business as a biotech-focused alternative asset manager: Royalty Pharma is agnostic around the type of therapy, modality and the drug class; rather it aims to use its financial expertise to help facilitate transactions.

Typically, management acquires its royalties by buying from other owners, spending at least $2 billion a year on deals. The money often provides companies capital to pay for late-stage clinic testing, to fund product launches or for earlier-stage development efforts.

It’s a good business, generating average growth in the low teens over its three decades, with the firm now claiming its portfolio produces 56% of all the royalties paid out in pharma; its deals in place have longevity, too, averaging another 13 years of payments. Despite that, the stock is also nicely priced, gathering up north of $4 per share of earnings—a bargain price-to-trailing earnings of just over 8—while paying a dividend that yields around 2.6%. To be fair, valuation has been crimped by interest rate fears since the business does borrow money to help fuel investments, but it’s working to improve its appeal to investors.

Royalty has long paid a 6.5% management fee to an outside entity, but last month announced it’s bringing the business in-house. The move will save the company more than $100 million a year and give Royalty Pharma claim to the intellectual property—the deal-savvy and relationships basically—of the manager firm. At the same time, Royalty’s board authorized a whopping $3 billion share buyback program, with $2 billion of that to happen this year, which makes up something like 10% or a bit more of the current market cap. This year, management projects revenue between $2.9 and $3.05 billion, up 9% on the high end. Guidance usually proves conservative in part because it excludes flows from new acquisitions made during the year. Analysts see the bottom line reaching $4.70 per share, while Royalty Pharma aims to boost the dividend about mid-single digits annually. It smells like a nice turnaround play.

Technical Analysis

Public since mid-2020, RPRX held a range of roughly 35 to 42 until the end of 2022, before a horrific, never-ending decline took the stock to 26 or so in 2023 and, after a mundane recovery, a fall to 24 near the end of last year. But January’s buyback and consolidation plans snapped RPRX out of its funk, with shares moving straight up since then (up 10 weeks in a row), helping shares tag 20-month highs on big volume. Stop – 29

The Covered Call Trade

Buy Royalty Pharma (RPRX) Stock at 34, Sell to Open April 35 Strike Calls (exp. 4/17) for $0.70, or a Net Price of 33.30 or less

Static Return: $70 per covered call (2.1%)

Breakeven: 33.3

Covered Call Return (if assigned): $170 per covered call (5.1%)

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 33.3 or less. (In this case 34 minus 0.70 = 33.3. Or another example is you could pay 33.85 for the stock and sell the call for 0.55, which also equals 33.3)

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 March 4, 2025.

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