The election results and Federal Reserve rate cut were seemingly just what the market was looking for as the S&P 500 rallied 4.7% last week, the Dow added 4.65% and the Nasdaq gained 5.4%.
The Stock – Toast (TOST)
Toast has always had a solid growth story, and now it seems investor perception has finally turned up after a great Q3 report that showed much larger margin expansion to go along with the rapid, reliable growth outlook. Starting from the top, the company is one of the leading new-age payment and back-end software providers to restaurants both in the U.S. and overseas, which is a gigantic market that consists of 875,000 locations in the U.S. and another 230,000 in Canada, Britain and Ireland, as well as 220,000 food and beverage retailers like convenience stores that it’s beginning to target.
Obviously, order processing (online, drive-thru, in-person) is a core solution, but Toast’s offering goes way beyond that, helping clients with payroll processing, email and text marketing and reservations, managing tips and invoices, employee scheduling and building apps, which has made it a hit: In Q3, the firm added another 7,000 locations to its client base, which is now around 127,000, up 28% from a year ago; it’s more than doubled its U.S. market share in the past three years but is still only at 14% penetration.
Meanwhile, revenues lifted 26%, annualized recurring revenue was up 28% and gross payments volume lifted 24%, and importantly, there’s real bottom-line leverage showing up, with EBITDA of $113 million crushing estimates. (Indeed, the top brass hiked its 2024 EBITDA guidance; went from $295 million to $357 million after the report!). And there should be more of that to come—at its Investor Day in May, the firm indicated it thinks EBITDA can reach 30%-plus of its recurring revenue streams in a couple of years (this year should be around 26%) and north of 40% in the long term, which points to sustained, huge earnings and cash flow growth for many years.
From here, it’s simply a matter of making the right moves, as Toast is crushing its legacy competitors (though it does have some new-age peers), and if it does get a bunch of traction in new areas (overseas locations, convenience stores, etc.), the upside will be huge.
Technical Analysis
TOST technically bottomed back in 2022, but the stock has essentially been carving out a huge bottoming area since then, with resistance repeatedly showing up in the 28 area and with some wild declines appearing here and there. This year, though, has been more controlled, with shares holding north of their 40-week line, and the stock’s character started to change in mid-September, as shares picked up steam, nosed above resistance last month and decisively moved to multi-year highs after earnings last week. Stop – 30.5
The Covered Call Trade
Buy Toast (TOST) Stock at 38.5, Sell to Open December 38 Strike Calls (exp. 12/20) for $2.25, or a Net Price of 36.25 or less
Static Return: $175 per covered call (4.82%)
Breakeven: 36.25
Covered Call Return (if assigned): $175 per covered call (4.82%)
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 36.25 or less. (In this case 38.5 minus 2.25 = 36.25. Or another example is you could pay 38.75 for the stock and sell the call for 2.50, which also equals 36.25)
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 |
| ON Holdings (ONON) | 51.9 | 51.5 | 43.5 | November 50 -- $4.92 | $2.00 |
| Robinhood (HOOD) | 26.2 | 33 | 22 | November 27 -- $1.90 | $6.00 |
| Delta Airlines (DAL) | 54.4 | 64 | 46.5 | November 55 - $1.75 | $9.00 |
| Credo (CRDO) | 41.3 | 47 | 33.5 | November 40 -- $3 | $7.00 |
| Alcoa (AA) | 41.9 | 42 | 36 | November 41.5 -- $1.90 | $1.25 |
The next Cabot Profit Booster issue will be published on November 19, 2024.
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